This list is not exhaustive and there may be overlap, but it demonstrates the variety of instruments and strategies utilized by hedge fund managers.
Convertible arbitrage: Involves buying convertible bonds and selling short the underlying common stock. The conservative strategy uses a higher level of leverage.
Distressed securities: This strategy attempts to identify securities of companies that are under pressure due to a particular event such as bankruptcy or corporate reorganization.
Emerging markets: Looks to invest in securities of companies or the sovereign debt of developing countries.
Long/short equity: Involves holding a portfolio of long and short stock positions. Strategy could involve a market neutral approach (equity market neutral) where short positions offset long positions in like sectors in an attempt to eliminate market exposure. Most long/short programs maintain a long bias (equity non hedge) and make directional bets on the market with short exposure.
Equity Market Neutral: See long/short equity (previous).
Event driven: Investing in opportunities created by corporate events such as spin-offs, mergers and acquisitions, bankruptcies, recapitalizations and share buy backs. Also referred to as “special situation.”
Fixed income arbitrage: Attempts to profit from inefficiencies between related interest rate securities and derivatives. Managers make bets on the cash/future basis, yield curve, interest rate swaps and bond yields of different governments.
Global macro: Managers can be long or short in a variety of financial instruments. The strategy often will be in stocks, bonds, foreign exchange and derivatives on a global basis. The strategy, which at one point was the most popular measured by assets under management, affords more discretion to managers.
Managed futures: There is a debate on whether managed futures represents a class of hedge funds, but it clearly is an important part of an alternative investment allocation. While synonymous with trend following, the fastest growing sub strategies include options writing and various forex strategies.
Market timing: Uses trend following methodology to get in and out of investments. Managers usually move assets between mutual funds to money markets depending on market conditions.
Merger arbitrage: This approach usually involves buying stock in a company that is the target of an acquisition and selling that of the company making the acquisition. Managers often use options to limit risk.
Private equity/Activist: Managers hold concentrated positions in a limited number of equities. Managers will often use position concentration to take an active role in the management of the companies it owns a stake in.
Relative value arbitrage: Attempts to exploit pricing discrepancies between relationships in equities debt instruments, options and futures.
Sectors: Funds that use various strategies but invest in a specific market sector such as energy, financials, health care or technology.
Short selling: Involves selling short stock in companies the manager expects to decline.
Fund of funds: Managers can diversify within a sector or across the whole spectrum of hedge fund styles. Capacity issues created by high demand have put a premium on managers who can perform the due diligence involved in selecting the best performing funds.
