What are Hedge Fund Strategies?
It is widespread for Hedge Funds to implement strategies to profit from trades. Another objective of these strategies is to capture incentive fees.
One of the strategies which a hedge fund generally uses is Arbitrage. In Arbitrage, hedge funds do short selling an asset that is believed to be overvalued and then buys an asset that is believed to be undervalued to exploit a pricing differential.
Example of Hedge Fund Strategies:
There are many other strategies used by hedge funds, including the following:
In this strategy, the fund manager gets the advantage of mispriced securities. Fundamental analysis is conducted on stocks that most analysts generally ignore to find mispricings. After identification, the manager will purchase a stock that is considered undervalued and short sell a stock deemed to be overvalued.
The other strategy of Dedicated Short is focused on finding a company that is considered to be overvalued and then short-selling the stock. As a practice, short-sellers are looking for companies with weak financial performance that the market has not captured.
Why are Hedge Fund Strategies essential?
Risk managers need to know about the hedge fund strategies because hedge funds are considered institutional investors. While they operate in bigger quantum, investors may adopt similar approaches to make a profit and can go wrong in a conventional small-sized financial institution.