Question

How do the investment strategies utilized by a hedge fund differ from the investment strategies typically used by a long-only traditional investment manager?

Answer 1

Hedge funds are alternative investments using pooled funds that employ different strategies to earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). It is important to note that hedge funds are generally only accessible to accredited investors as they require less SEC regulations than other funds. One aspect that has set the hedge fund industry apart is the fact that hedge funds face less regulation than mutual funds and other investment vehicles.

Hedge funds must set rules to let investors understand their approach on the markets.

Long only means what it says: a long-only hedge fund has only long positions in the assets it owns (usually used for equity). So this means that whenever a bear market happens, they will still buy stocks, finding probably the contrarians to the general trend or at least those with the beta closer to zero.

It is often considered “inappropriate” to have short positions from an ethical perspective, as you are betting that the asset class you shorted will see its value decreased and in some extent contribute to this decrease by sending the signal to the market that you “expect” it to go down. This is especially true for big asset management/investment companies. A long only fund is popular also because of this: there is only a positive view on the markets, which could differ in its composition depending on the overall behaviour of markets.