Question

20. What are the different categories of hedge funds?

Answer 1

Following are the different categories of hedge funds:

1. Long-short funds- This means both positions are being held simultaneously for securities which are expected to perform and underperform. This is a flexible and balanced strategy to manage a fund.
2. Event-driven funds- This funds try to gain from any events such as corporate action, political developments etc.
3. Macro funds- They invest in wide range of securities-bonds, stocks, currencies etc whose prices are influenced by macro-economic conditions. As a result associated risk is high.
4. Distressed securities funds- These are risky investments if a company files for bankruptcy, otherwise these can be bought with large discounts.
5. Emerging market funds- These funds arte invested in securities of developing countries, so they can be more risky due to high volatility but returns could also be higher,
6. Long-only funds- These are for gaining due to increase in prices, it is only risky if the market is particularly bearish.
7. Short-only funds- These are for gaining due to decrese in prices, it is only risky if the market is particularly bullish.
8. Fixed-income arbitrage funds- It takes advantage of price differences between fixed income securities,
9. Merger arbitrage funds- It buys and sells stocks of companies going through merger, so generally target company price increases and acquiring company price decreases.