As well as having the potential to return huge yields, there’s another reason why hedge funds are regarded as quite an ‘exclusive’ investment method. In short, they’re exceptionally complicated, and it takes the very best in the financial markets to put together a successful investment strategy.
It’s one of the reasons why companies such as Kingstown Capital are so in-demand. Anyone with vast experience is going to be sought after; trading successfully with hedge funds requires a huge degree of skill and isn’t to be sniffed at.
To highlight just how hedge fund strategies can differ, we’ve pulled together the following categories which highlight what investors tend to opt for.
For those investors looking to turn to a relatively low-risk strategy, this is one method that is very favorable. The reason behind the low-risk-factor is simple; it’s usually based on price inefficiencies. As such, it’s not an overly common form of investment and investors are often quick to snap them up if they become available.
Usually, convertible arbitrage will occur when an investor purchases convertible securities of a company before short-selling these securities back. These securities tend to come in the form of a convertible bond, which can be turned into common stock at a later date.
Something that’s slightly riskier comes in the form of event-driven investing. This is an example of a fund manager having to be “hot” on industry news, and ready to act when necessary. For instance, if significant news such as a merger or profits warning is announced, the price can start to become inefficient. It’s at this point where a savvy investor will act to boost his returns – whether this is buying or selling at the right time.
In truth, distressed securities carry a similar amount of risk to the previous strategy we’ve just looked at.
This time, rather than acting on news, an investor will take action when a company is in obvious financial distress or has announced restructuring. The process involves buying securities of the companies like bonds, bad debt or various types of stock. The reason it can be lucrative is that due to the distressed nature of the company, these securities tend to be bought at much lower prices than the market would normally dictate.
We’re going to end with a strategy that is regarded as high-risk but ultimately, as is the case in the financial industry, this can lead to monumental yields.
Turning to emerging market funds means targeting any securities which are based in companies who are fixed in emerging countries. As such, if a company is located in a country which is developing and has favorable statistics in relation to the economy, there’s an obvious suggestion that this could result in future growth.
At the same time, there’s a chance that the market might go the other way – and this is why this method of investing does carry a lot of risk despite the high rewards that are potentially on offer.