Hedge Fund Reader : Diversity In Hedge Fund Industry

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December 27, 2005

Diversity In Hedge Fund Industry

For most retail investors, the whole hedge fund industry is just the same - Just out of their reach. However, a closer look at the hedge fund sector reveals many variations within it. There is diversity within the Hedge Fund Industry. For the starters, let’s just discuss the three broad classifications of hedge funds.

The first class of hedge funds is the Macro Funds, which are known to take large un-hedged positions in national markets based on top-down analysis of macroeconomic and financial scenario. One of the most important attribute of such funds is the care with which they are positioned. These funds usually take position in either mature or key emerging markets. Also, there investment pattern is quite diversified. They are known to spread their holdings across equities, bonds and currencies. This gives them enough risk cover, with strong earning potential. Most of the long-established macro funds find it strategic to use conventional forwards and futures to take positions ahead of the market moves they foresee. However, some of the newer macro funds exhibit specialized trading strategies, with use of complex derivative securities.

The second class of hedge funds is the Global Funds. These funds are known to take their positions worldwide. Further, such funds follow and employ a bottom-up analysis, which translates into picking stocks on the basis of individual companies' prospects. This is a more micro approach to asset selection.

The third class of hedge funds is the Relative Value Funds. These funds are known to take bets on the relative prices of closely related securities, which include treasury bills and bonds. One of the key identifiers of these funds is their investment pattern. They are known to limit their asset investment to only mature markets. This is because their core expertise is limited to mature markets. And another element is that relative value funds are inclined to use derivatives.

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December 27, 2005 in Emerging Markets | Permalink