In what kind of investments do hedge funds invest?
Most hedge funds employ a strategy and make investments around that strategy, but may rapidly change strategies when markets change. One type of hedge fund, “global macro,” may take a position in an equity, currency, or bond of a country in anticipation of a large event that may positively affect the price, thus generating returns that are favorable to investors. Hedge funds may employ software and use mathematical models to generate returns. Other times, investment managers and analysts identify likely candidates according to their trading objectives, and try to make returns. Many hedge funds use a combination of both approaches.
Another type of hedge fund, “directional,” may try to provide returns through understanding and placing bets on the general direction of markets, no matter where they are located. For example, a hedge fund manager may think a market is undervalued, and may engage in long equity positions, hoping the market will increase and realize its true value, and make positive returns. Hedge funds may also employ the opposite strategy, acting as a hedge, and employing short sales in case the market moves in the opposite direction, and make returns if the market falls.
Some hedge funds employ an event-driven strategy that may involve the merger, bankruptcy, or acquisition of a corporate investment. This may also include the default of a country on its debt obligations, and the effects that such an event may have on the price of the country’s equities or currency. Wars, regional conflicts, disruption of oil, and other inputs may also be used to help drive profits for the fund.
Other hedge funds may try to profit from discrepancies in prices of investment vehicles such as currencies, equities, and bonds. The hedge fund may employ sophisticated mathematical models and software in order to identify these price discrepancies, and may try to take positions both long and short in order to provide maximum return to investors.