Hedge fund strategies explained

"Hedge fund" describes a legal structure, not a single way of investing. Funds range from conservative arbitrage to concentrated bets. Here are the main strategy families allocators use to group managers.

Long/short equity

The most common strategy. Managers buy stocks they expect to rise and sell short stocks they expect to fall. Net exposure (longs minus shorts) can range from near zero, called market neutral, to strongly long. Returns depend on stock selection more than on the market's direction.

Global macro

Macro funds trade interest rates, currencies, commodities and stock indexes based on views about economies, central banks and politics, often with futures and options. Discretionary macro relies on a manager's judgment; systematic macro uses models.

Event-driven

These funds invest around corporate events: mergers (merger arbitrage), spin-offs, restructurings, activism and bankruptcies (distressed investing). Returns come from how events play out rather than broad market moves.

Relative value and arbitrage

Relative value funds look for pricing gaps between related securities, such as a company's convertible bond and its stock, or similar bonds on the yield curve, and profit as the gap closes. They often use leverage because each trade's expected profit is small.

Credit

Credit funds buy and short corporate bonds, loans and structured credit, from high-yield to distressed debt. Some focus on direct lending.

Quantitative

Quant funds trade with statistical models and automated systems, often across thousands of positions and holding periods from seconds to months.

Managed futures (CTAs)

Commodity trading advisers trade futures across markets, often following trends. They have tended to do well in long, sustained market moves, including some sell-offs.

Multi-strategy

Multi-strategy funds run many of the above at once, often through separate teams with tight risk limits. The largest hedge fund firms are mostly multi-strategy platforms.

Fund of funds

A fund of funds invests in other hedge funds, adding diversification and manager selection for a second layer of fees.

How to tell which strategy a fund runs

Form D does not report strategy, so the fund's documents and conversations with the manager are the source. Fund names sometimes hint at it ("Macro", "Credit", "Long/Short", "Arbitrage"), and 13F filings show a manager's long equity positions. Managers who claim their listing on HedgeMountain describe their strategy on their fund page.

Comparing strategies? Read hedge fund fees explained and how to research a hedge fund.

Education, not advice. This guide explains general rules and market practice. It is not legal, tax or investment advice, not an offer or solicitation, and not a recommendation of any fund. Rules change; confirm details with the SEC and a qualified professional. Disclosures