Hedge funds and strategies

 

Here’s a comprehensive guide to hedge funds and their strategies, explaining what they are, how they differ from other investments, and what strategies they employ to generate returns.

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🧾 What is a Hedge Fund?

A hedge fund is a pooled investment vehicle managed by professional managers that uses diverse and often aggressive strategies to generate high returns for high-net-worth investors and institutions.

🔐 Typically accessible only to accredited investors due to higher risk, complex strategies, and regulatory exemptions.

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📊 Key Features of Hedge Funds

Feature	Description
Structure	Often structured as private limited partnerships or trusts
Fee Model	Commonly "2 and 20": 2% mgmt fee + 20% profit share
Investment Freedom	Can invest in equities, bonds, currencies, derivatives, etc.
Leverage	Often used to amplify returns
Liquidity	Lower than mutual funds; may have lock-in or quarterly exits
Regulation	Less regulated than mutual funds or ETFs

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🔍 Common Hedge Fund Strategies

1. Long/Short Equity

• Buy undervalued stocks (long), short overvalued stocks.

• Objective: Profit from price divergences.

• ⚖️ Example: Long on TCS, short on a weak IT firm.

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2. Market Neutral

• Long and short positions offset market exposure.

• Aims to generate alpha regardless of market direction.

• 📊 Example: Equal weight long & short on two banking stocks.

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3. Event-Driven

• Exploits price inefficiencies from corporate events.

  • Merger arbitrage

  • Spin-offs

  • Bankruptcies

• 💼 Example: Buy target company, short acquirer in a merger.

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4. Global Macro

• Large bets on macroeconomic trends (interest rates, currencies, geopolitics).

• Invests in a mix of equities, bonds, forex, commodities.

• 🧠 Example: Short GBP during Brexit uncertainty.

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5. Distressed Securities

• Invest in companies facing bankruptcy or restructuring.

• Risky but potentially high reward post-turnaround.

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6. Arbitrage Strategies

• Exploit pricing inefficiencies across markets or instruments.

  • Convertible arbitrage

  • Fixed-income arbitrage

  • Statistical arbitrage

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7. Quantitative (Quant) Strategies

• Use algorithms, AI, and models to spot trends.

• Includes high-frequency trading (HFT).

• 🧠 Example: Machine-learning-based trade signals on stock momentum.

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8. Multi-Strategy

• Combines multiple approaches to diversify risk and optimize return.

• Often rebalances between strategies based on market conditions.

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🔢 Performance Metrics

Metric	What It Measures
Alpha	Return above market benchmark
Beta	Sensitivity to overall market movement
Sharpe Ratio	Risk-adjusted return
Drawdown	Largest portfolio decline from peak
Sortino Ratio	Risk-adjusted return considering downside only

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🔐 Hedge Funds vs Mutual Funds

Feature	Hedge Fund	Mutual Fund
Investor Eligibility	Accredited/HNWIs only	Open to retail investors
Regulation	Lightly regulated	Heavily regulated (SEBI/SEC)
Strategy Flexibility	High (shorting, leverage, exotic)	Limited
Fees	High (2% + 20%)	Low (typically <2%)
Transparency	Low (limited public info)	High (daily NAVs, holdings)
Liquidity	Lower (quarterly/yearly redemptions)	High (daily redemption)

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🌍 Top Hedge Funds Globally (2024–25)

Fund Name	Strategy Type	Famous Manager
Bridgewater Associates	Global Macro	Ray Dalio
Renaissance Technologies	Quant Strategies	Jim Simons
Citadel LLC	Multi-Strategy	Ken Griffin
Pershing Square	Long/Short Equity	Bill Ackman
Third Point	Event-Driven	Daniel Loeb

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📈 Hedge Funds in India

While hedge funds are not common in the retail space due to SEBI regulations, Category III AIFs (Alternative Investment Funds) operate similarly.

• Examples:

  • Avendus Capital (India) – Long/short fund

  • True Beacon – Low-fee hedge-style fund by Nikhil Kamath

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⚠️ Risks of Hedge Funds

Risk Type	Description
Leverage Risk	Losses magnified due to borrowed capital
Liquidity Risk	Cannot exit easily
Strategy Risk	Some strategies may fail in certain markets
Transparency Risk	Limited insight into portfolio holdings

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🧠 Summary

Parameter	Hedge Fund Insights
Primary Goal	Generate absolute returns
Investor Type	HNIs and institutions
Strategy Variety	Extensive (long/short, arbitrage, macro, etc.)
Fee Structure	High, performance-linked
Risk Level	High but can be hedged