Hedge Fund Modelling and Analysis Using Excel and VBA

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Major Hedge Fund Strategies

Hedge funds can be classified in a number of different ways, e.g. by particular asset, geographical location of strategy or industrial sector. The most common hedge fund classification is by strategy and then by style within that strategy. There are three major hedge fund strategies, namely relative value, event-driven and tactical, each with its own individual strategy styles.

This chapter introduces the most common investment strategies within each of the major hedge fund strategy styles. Emphasis is placed on equity related strategies since these will be the focus of more detailed quantitative modelling and analysis in later chapters.

2.1 SINGLE- AND MULTI-STRATEGY HEDGE FUNDS

Hedge funds are a private investment vehicle with a collective pool of money designed to exploit superior manager skills in order to make above average returns for investors. Single-strategy funds rely heavily on the expertise and knowledge of the hedge fund manager(s) to provide such returns using a specific investment strategy (see Figure 2.1). Considerable and effective due diligence is required when attempting to select top (or star) managers in single strategy funds. Such research can be very time-consuming and costly along with the additional problems associated with gaining access to a professional network of top managers.

Although fund managers are usually willing to discuss the general structure of a particular chosen strategy, they are unlikely to divulge sensitive ...