Hedge Fund Investment Strategies

Investing in various financial markets has bought opportunities and risks in all quantities and qualities. Traders still invest in the hope of earning and trying their luck in the instruments and trades. We’ll focus on the investment strategy that traders could use to minimize their market risks. 

The article is about hedge fund investment strategies; readers will gradually, from hedge funds to its trading strategies, understand it completely. Hedge funds are a unique yet simple trading style used by traders. It lowers their risks and has some profits from their investments. 

Let’s know the terminology better and what all it offers for investors to make their best trading experience. 

What is a Hedge Fund?

A hedge fund is a trading investment of the financial market that allows the investors to pool their money and invest it further for a potential market gain. The strategies of hedge funds are more flexible. They tend to seek profits from all kinds of markets using leverage, short-selling, and other speculative investment practices with other trading instruments like mutual funds. 

If we define it in simple terms, it could be called an alternative investment of the traders. Investors of the financial market feel that their existing investment might make them suffer losses. In such a situation, the trader would invest in other instruments across the market, which would minimize the risks. 

The main motive of hedge funds was to diversify the portfolio or hedge the portfolio’s risks for long market positions. Therefore, these were initially designed to provide stable and non-volatile returns independent of the existing market conditions. 

For being a hedge fund investor, one has to be an accredited investor, meaning one has a minimum level of income or securities for investing in the hedge funds. This includes institutional investors like pension funds, insurance funds, etc., and wealthy individuals. 

Here are some key areas that investors should consider before investing in hedge funds: 

  • Go through the hedge fund offering memorandum and related topics 
  • Understand all the hedge fund investment strategies 
  • Know whether the fund uses leverage or any other speculative technique 
  • Evaluate the potential conflicts of interest that the fund manager discloses
  • Understand valuation of hedge funds 
  • Know how the fund’s performance is determined 
  • Understand the limitations of hedge fund rights to redeem shares 
  • Research the background of hedge fund managers 

Hedge Fund Investment Strategies 

The hedge fund investment strategies are significant for the market traders due to their risk tolerance level and investment philosophies. A trader can use it for various market instruments, ranging from debts, equities, commodities, currencies, derivatives, real estate, and other financial instruments. 

In recent times, the hedge fund investment strategies have grown in number with their use among the traders. The terms of the hedge funds are primarily based on the strategies and the level of liquidity available. Mentioned below are common hedge fund investment strategies: 

Long/Short Equity 

The long/short equity is the most common and initial hedge fund strategy. Alfred W. Jones first introduced the strategy in 1949, and it still holds a great marketplace for traders. With the long/short equity strategy, the traders take long or short positions in the equities or the equity derivative instruments. 

The strategy uses various fundamental and quantitative techniques for making its trading decisions. It is used for trading publicly traded equity and its derivatives; moreover, these tend to be long-biased. The long/short equity hedge fund investment strategy has reasonable terms that are straightforward.

Credit Funds  

The credit funds make debt investments that are based on lending inefficiencies. It follows a cyclical pattern that is active, knowing the economic downturns and restrictions in the credit market. These incorporate distressed debt and fixed income, direct lending, and other trading strategies. Here we have distressed debt and fixed income defined. 

Distressed Debt  

It is an investment in the corporate bonds, bank debts, and the preferred stocks of the companies in distress. When a company cannot fulfill its financial market obligations, then its debt devalues. The distressed debt funds use fundamental analysis to identify the undervalued investments of the market. Therefore, the investors of hedge funds using distressed debt need to have a more stringent lock up and withdrawn terms. 

Fixed Income 

In fixed income, the investor trades in government, banks, corporate bonds, debentures, capital notes, convertible notes, and derivatives. These have a fixed rate of interest. These have low-risk tolerance compared to the distressed debt and have capital preservation as their priority. 


Investors use the arbitrage strategy of hedge funds to exploit the observable price difference of the closely related investments by simultaneously purchasing and selling assets. If the traders use it accurately, the strategy produces consistent market returns and has low risk. 

However, the price inefficiencies of the investments are slight, which makes the arbitrage funds rely highly on the leverage. This gives the traders significant market returns. It should be noted that the high use of leverage in arbitrage has led many firms to loss due to the unexpected market shifts of prices. It has the following types included: 

  • Fixed-income arbitrage 
  • Convertible arbitrage 
  • Relative value arbitrage 
  • Merger arbitrage 


The event-driven strategies are related to the arbitrage strategies of hedge funds; these seek to exploit the price inflation and deflation which occurs in response to certain corporate events. These could include mergers, takeovers, acquisitions, reorganization, restructuring, spin-offs, bankruptcy, instrument sales, etc., that creates inefficient pricing. 

The strategy requires expertise in fundamental analysis and modeling of corporate events. 


Hedge fund investment is a good way of diversifying the portfolio and minimizing the market risks. Traders can use it with efficient and excellent market knowledge to get high market returns. The article has described what hedge funds traders can look for before investing with hedge funds. Also, hedge fund investment strategies are most frequently used by traders. 

Investors can use these with the help of online brokers such as Investby. The broker has trading platforms, tools, research, education, strategies, accounts, and other facilities. Hedge fund investment strategies are also available with the brokers and could be used for risk management

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