Hedge Fund Styles

There are many hedge fund investment styles. Some key hedge fund styles will be discussed here. It is important to understand different hedge funds styles when investing in hedge funds so that you know you are investing in the right investment vehicles. Some hedge fund styles are fixed income hedge fund styles whereas others are stock based and mixed hedge fund styles.

The predictability of future results of different hedge fund styles shows a strong correlation with the volatility of each strategy. Future performance of hedge fund investing strategies with high volatility is far less predictable than future performance from strategies experiencing low or moderate volatility.

Hedge Funds Investment Styles 1: Aggressive Growth

Aggressive Growth hedge funds invests in equities expected to experience acceleration in growth of earnings per share. Aggressive Growth hedge funds have generally:

• high P/E ratios,
• low or no dividends;
• often smaller and micro cap stocks which are expected to experience rapid growth.

Aggressive Growth hedge funds include sector specialist funds such as technology, banking, or biotechnology. Aggressive Growth hedge funds hedge by shorting equities where earnings disappointment is expected or by shorting stock indexes. Tends to be long-biased.

Expected volatility of Aggressive Growth hedge funds is high.

Hedge Funds Investment Styles 2: Distressed Securities

Distressed Securities hedge funds buy equity, debt, or trade claims at deep discounts of companies in or facing bankruptcy or reorganization. Distressed Securities hedge funds profit from the market's lack of understanding of the true value of the deeply discounted securities and because the majority of institutional investors cannot own below investment grade securities. (This selling pressure creates the deep discount.) Results of Distressed Securities hedge funds generally do not dependent on the direction of the markets.

Expected volatility Distressed Securities hedge funds is Low to Moderate.

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