Hedging Strategy

Hedging is a common hedge fund strategy. Each of the hedging strategy described below are hedge fund hedging strategies. There are many types of hedging such as Forex hedging, prime interest rate hedging, options hedging, currency hedging, and money market hedging. Below, we discuss hedging strategies.

What are the different hedging strategies?

A wide range of hedging strategies are available to hedge funds. For example:

Hedging Strategy #1: Short Bias

Short Bias is a hedging strategy where hedge fund managers sell shares without owning them, hoping to buy them back at a future date at a lower price in the expectation that their price will drop.

Hedging Strategy #2: Arbitrage

Arbitrage is a hedging strategy where hedge fund managers seek to exploit pricing inefficiencies between related securities. An example of arbitrage can be long convertible bonds and short the underlying issuers equity.

Hedging Strategy #3: Trading Options or Derivatives

Trading Options or Derivatives is a hedging strategies where hedge fund managers trade derivatives and options contracts whose values are based on the performance of any underlying financial asset, index or other investment.

Hedging Strategy #4: Event Driven

Event Driven is a hedging strategy where hedge funds managers invest in anticipation of a specific event, merger transaction, hostile takeover, spin-off, exiting of bankruptcy proceedings, etc.

Hedging Strategy #5: Distressed Situations

Distressed Situations is a hedging strategy where hedge funds managers invest in deeply discounted securities of companies about to enter or exit financial distress or bankruptcy, often below liquidation value.
Many of the strategies used by hedge funds benefit from being non correlated to the direction of equity stock markets.