Hedge Fund Strategies and Investment Styles – Knowing the Basics

Wondering how hedge funds are able to generate massive returns for the investors? While it is impossible to uncover the mystery behind the working of a hedge fund, there are some common investment styles for most of the hedge funds. Besides setting the expectations for long-term potential performance, investment style helps the fund in advertising to the investors looking for a particular type of market exposure. Most of the mutual funds, like HedgeConnect.co employ a consistent investment style. The selection of an investment style largely depends on the investor’s tolerance to risk, all the while maintaining diversification of the investments.

In the context of stock mutual fund investments, one of the below three investing styles is used by the hedge funds to create a fund portfolio:

 Investing in value stocks
 Investing in growth stocks
 Investing in value and growth stocks

Value stocks are perceived to be less risky and offer less return, while growth stocks come with more risk and more return. This way, blend investing style comes as a compromise of the two. Investment style and the size of the fund are the key indicators of the fund’s risk-return parameters and portfolio asset allocation.

There are some more styles like small cap investing, large cap investing and active trading. As an investor, you should opt for hedge fund that displays consistency in its investment style. Frequent change in investment style means the fund managers are chasing performance, thus increasing the risk.

Some of the popular hedge fund investment strategies include the below ones:

 Activist
 Convertible
 Equity
 Long-short
 Emerging Markets
 Arbitrage
 Fund of Funds
 Fixed Income
 Statistical Arbitrage
 Options Strategy, etc.

Hedge funds are the favorite of top managers, wealthy individuals, pensions, sovereign wealth funds, corporations, insurance companies and institutions. Family trusts go for lending platforms, like the one offered by HedgeConnect and crypto hedge funds to gain access to the best minds in the industry. They offer crypto investors both opportunities and risks. Portfolio managers often take short positions in securities and long positions to benefit from the rising valuations. They do so to hedge against the market declines (hence the name) and deliver consistently positive returns, disregarding the direction market is moving to.

Cushioning against the downturns

Hedge fund investors are sophisticated ones; they understand how hedge funds utilize options, leverages, derivatives and futures contracts to boost crypto profits. The investors are required to have at least $1 million in net worth. This amount is needed to serve as cushion to wade through the downturns in their portfolio to achieve higher returns. The investors are usually required to pay 2 percent of the assets and 20 percent of the crypto profits gained by them. This high price is worthy, as it’s required to outperform the markets.

Why invest in lending platforms and hedge funds?

People often put less than 20 percent of their assets into the hedge funds and lending platforms, like the ones provided by HedgeConnect.co to increase their portfolio diversification. As the fund is not correlated to their other investments, it allows them to make profits even if the stock market loses value. Diversification of the portfolio reduces the overall volatility and enhances return over a period of time.

Hedge funds are relatively unregulated compared to mutual funds, and allow the investors to choose from a wider range of securities. While many hedge funds invest in the traditional securities like bonds, real estate, commodities and stocks, they are known for using sophisticated investment techniques and support for crypto investments and crypto currencies.

Strategies used for higher gains

Some hedge funds use leverage to invest with borrowed money and increase the potential of return. Through leverage, the hedge funds try to offset the losses by hedging the investments. Some hedge funds invest in derivatives, which are actually contracts to buy or sell another security at a certain price. However, hedge funds are typically not as liquid as mutual funds and are open only to a limited range of investors.

Notwithstanding some of the recent challenges to hedge funds, they offer a solid and alternative investment vehicle to the investors. Some of them have been found to be fraud, like Bernard L. Madoff Investment Securities. So, the investor must exercise due diligence before putting their money into these alternative investment vehicles.