Hedge funds use a wide area of investment strategies according to the risk return objective taken by the management. As the Hedge funds seek for higher absolute return, they always take very high risk while taking any investment decisions. The Hedge fund investment strategies include
They invest in stocks, bonds, derivatives, commodities, distressed securities, currency derivatives etc. Distresses securities are normally valued very low and have high potential upside.
They mostly look for the arbitrage opportunities. Whenever there is any price mismatch or the arbitrage opportunities, they immediately invest to gain profit out of the price mismatch.
They invest a lot of money in short selling or to short the shares. They hold both the positions long and short to earn money out of it and reduce the risk of any sudden market movement on either side.
They do event driven investments where they invest money for any news of event or even rumors. If there is expected to be good news in the market they take long position, otherwise for any expected bad news they take a short position. Hedge funds always look for these opportunities to invest money which provide higher return with very high risk. Hedge funds use the news or rumors of any merger and acquisition, hostile takeover, any probable bankruptcy, debt default etc. as an investment opportunity to generate higher return.
Hedge funds invest in complex derivatives including currency and interest rate related derivatives to gain money from any kind of fluctuation in the same.
Hedge funds invest based on any macro-economic events which are expected to provide better return in future.
Hedge funds have more exposure in the emerging markets which normally provides higher return and helps to diversify the market related risks.
Hedge fund also invests in asset backed debts like mortgage backed securities, collateralized debt obligations, collateralized mortgage obligations etc.