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Alternative Investment Funds (AIF) and hedge funds
Hedge Fund Strategies
Learning Outcome
5
Evaluate risk, returns, and investor suitability.
4
Understand leverage, short-selling, and derivatives.
3
Identify common hedge fund strategies.
2
Differentiate hedge funds from mutual funds and ETFs.
1
Define Hedge Funds and their key features.
What is a Hedge Fund?
A Hedge Fund is a privately pooled fund that uses advanced strategies, leverage, and derivatives to generate returns.
Under SEBI's AIF Regulations 2012, Hedge Funds are classified as Category III AIFs.
They are characterised by:
Key Characteristics of Hedge Funds
Common strategies used in Hedge Funds
A fund manager buys undervalued stocks and shorts overvalued stocks to profit while reducing market risk.
Long-Short Equity Strategy
Market Neutral Strategy
The manager maintains balanced long and short positions, aiming to profit from stock selection rather than market movements.
Global Macro Strategy
The fund manager makes investment decisions based on economic trends such as interest rates, inflation, policies, and currency movements.
Event-Driven Strategy
The fund manager invests based on corporate events such as mergers, acquisitions, bankruptcies, or earnings announcements.
Arbitrage Strategy
The fund manager profits from price differences by buying an asset in one market and selling it in another at a higher price.
Distressed Securities Strategy
The fund manager buys distressed companies at low prices, expecting recovery or higher asset values in the future.
Quantitative Strategy
The fund manager uses algorithms and data models to automatically execute trades based on market patterns.
Managed Futures Strategy
A fund manager trades futures across commodities, currencies, and indices to profit from market trends in any direction.
Summary
5
They offer high return potential with higher risk.
4
Decisions are driven by events, data, and economic trends.
3
Many strategies aim to manage risk through hedging.
2
They invest across equities, bonds, currencies, and commodities.
1
Hedge funds use advanced investment strategies.
Quiz
Which hedge fund strategy uses mathematical models and algorithms?
A. Arbitrage
B. Quantitative Strategy
C. Market Neutral
D. Managed Futures
Quiz-Answer
Which hedge fund strategy uses mathematical models and algorithms?
A. Arbitrage
B. Quantitative Strategy
C. Market Neutral
D. Managed Futures
Fixed Income Portfolio Strategy - Hedge Fund Strategies
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