Japan hedge fund

 

Low volatility hedge fund strategies

2.  low volatility hedge fund strategies

Hedge fund managers have several investment strategies at their disposal, each giving the hedge fund a different degree of risk, volatility and return. Understanding the characteristics of different hedge fund strategies is the key to realizing their investment potential.

The most common low volatility hedge fund strategies are:

  • Income hedge fund: The hedge fund manager's primary focus is on yield or current income and not simply on capital gains. Leverage may be used to buy bonds and fixed income derivatives so as to profit from appreciation of principal and interest income.
    Volatility: Low
  • Market Neutral Arbitrage hedge fund: The hedge fund manager tries to hedge against market risks by taking offsetting positions usually (but not always) in different securities of the same issuer. The hedge fund manager focuses on realizing returns that have little or no correlation to the equity and bond markets. These so-called "relative value hedge fund strategies" include capital structure arbitrage, closed-end fund arbitrage, fixed income arbitrage and mortgage backed securities.
    Volatility: Low
  • Market Neutral Securities Hedging hedge fund: The hedge fund manager invests in portfolios of long and short equities in equal amounts and generally in the same sectors of the market. Although market risks are greatly reduced, good stock analysis and selection is essential for successful results. Leverage can be used to increase returns. This type of hedge fund usually has little or no correlation to the market. The hedge fund manager may occasionally use market index futures to hedge against market risks. The performance of this type of hedge fund is usually measured relative to the treasury bills index.
    Volatility: Low
  • Distressed Securities hedge fund: The hedge fund manager buys equity and debt of companies in, or close to, bankruptcy or reorganization (the US Chapter 11) at deep discounts. The hedge fund manager's opportunity arises because of the general market's lack of understanding of the fundamental true value of the distressed companies he/she selects and also because many institutional investors are restricted from holding securities that are considered less than investment grade. The performance of this type of hedge fund generally has little correlation to the bond and equity markets.
    Volatility: Low - Moderate
  • Value hedge fund: The hedge fund manager invests in securities selected because they are selling at deep discounts to their fundamental value. These securities may be out of favor for corporate or sector reasons or poorly covered by analysts. The hedge fund manager may need to hold the securities for a substantial time before their true value is recognized by the market.
    Volatility: Low - Moderate
  • Fund of Funds hedge fund: The hedge fund manager creates a hedge fund which is itself comprised of investments in a portfolio of other hedge funds and pooled investment vehicles. By balancing the different strategies and asset classes, the fund of funds hedge fund manager tries to achieve a more stable long-term investment return with more controllable risk and volatility than is likely to be achieved by any individual fund. Very often the preservation of investors' capital preservation is a major consideration to the fund of funds hedge fund manager and investor alike.
    Volatility: Low - Moderate - High

3.  moderate volatility hedge fund strategies >>


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