Financial Management

Hedge Fund Strategies in Finance

Hedge funds are known for their aggressive investment styles and use of a variety of strategies to generate returns.

Hedge fund strategies aim to generate high returns for investors, often with a higher degree of risk compared to traditional investments.

Four types of hedge fund strategies

  • Relative Value Arbitrate
  • Event-Driven
  • Equity-Based; and
  • Global Macro

Relative Value Arbitrage

Relative value arbitrage strategy is used to take advantage of price discrepancies between financial instruments. When there is a momentary discrepancy in the pricing between two or more related securities, the fund managers try to get benefits from purchasing the securities that are expected to appreciate and selling those securities that are depreciating.

The transactions will occur simultaneously as the manager behaves based on the assumption that the prices of these stocks will normalize, the arbitrage strategy of hedge funds capitalizing relationship on a relation between two or more securities in terms of price. Quick directional movements in the market can be dangerous. Fund managers are not paying attention to individual securities, but also the bucket of securities.

 Equity Hedge

This hedge fund strategy is also known as long/short. It is the most commonly used strategy in the hedge fund by fund managers. The fund manager tells the difference in the stock price by purchasing those securities that are deemed to be undervalued (long) and selling those securities whose prices are overvalued (short) at a certain point in time.  In this process, the manager uses two types of analyses to identify the fair price of stock-quantitative and qualitative analyses.

For example, fundamental analysis is used to assess the intrinsic value of an investment. While the long/short strategy doesn’t provide full guaranteed protection from the market, an equity market neutral strategy, which uses the same strategy as long/short, minimizes broad market exposure.


This is a hedge fund strategy concerned with the situation in which investment opportunity and risk are associated with an event. The company events are further categorized into three parts: – distressed securities, risk arbitrage, and special situations.  Distressed securities include such events as recapitalizations, restructurings, and bankruptcies.

Risk arbitrage includes such events as mergers, acquisitions, liquidations, and hostile takeovers. The investors would purchase and sell the shares of two or more merger companies to take advantage of market discrepancies. Special situation events are those events that impact the value of the stock of the company. To take advantage of special events the investor must identify upcoming events that will increase or decrease the value of shares.

Global Macro

This is a hedge fund strategy used by fund managers to analyse macroeconomic events to identify opportunities for investment that would profit from anticipated price movements. Global macro strategy is divided into two approaches- discretional approach and systematic approach. The discretional trading approach is carried out by the investment managers who identify and select investment opportunities.

A systematic approach is based on mathematical models. Global macro strategies are further divided into subcategories- systematic diversified or systematic currency. Under the systematic diversified category, the investors trade funds in the diversified market and in the systematic currency approach funds trade in the currency market.


In conclusion, hedge funds offer a diverse range of investment strategies that can potentially generate high returns. From profiting from market inefficiencies to capitalizing on global economic trends, hedge funds employ various tactics to achieve their goals. However, with this flexibility comes increased risk and complexity. Investors considering hedge funds should carefully evaluate their risk tolerance, investment goals, and the specific strategies employed by the fund before making an investment decision.

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