July 21, 2006

Risk Arbitrage on Hedge Funds

One of the common hedge fund strategies is to buy shares of a company that is in the process of a merger or acquisition. The company's stock should have a fixed price. Hence, it is a safe investment to purchase the stock and wait. Sometimes, this strategy can be risky, as there is no assurance that the merger will be finalized. The trade may also short sell the stock of the acquiring company in addition to buying the stock of the target.

In the past, most hedge funds employed this strategy. They were very popular to achieve more gain at a lower risk. However, the negative aspect of this strategy forced hedge fund managers to employ new strategies, which are aimed at high growth. Hedge fund market has been divided into several classifications. Fixed-income arbitrage, global convertible bond arbitrage and commodity trading are the most important classifications.

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