Hedge fund equity and option trading strategies
Equity market directional funds represent the most typical hedge fund strategy group in these days. Mostly trading stocks, they are like classical stock mutual fundsbut they typically have more freedom and more courage in their trading strategies. Unlike classical mutual funds, equity market directional hedge funds often:. Equity market directional funds are a very diverse group. Some funds are focused on picking single stocks from all sectors, while others are sector specialists and only trade for example healthcare stocks or IT stocks.
Some equity hedge funds bet on relative performance of one stock or sector vs. Regarding tools and decision makingmany fund managers dig deep into corporate fundamentals. There are other managers who are technicians and rely on charts, and other managers who build quantitative computer models. Many hedge funds combine all these approaches.
Every method has a potential to work if done right, but at the same time every approach can fail. The stock market game is hedge fund equity and option trading strategies and the rules are changing constantly. Because equity market directional funds are by definition non-neutral and have some market exposurethe main risk of investing in these funds is the systematic equity market risk.
If you invest in a fund that is net long stocks and the stock market crashes, you are very likely to lose money. This works the other way too hedge fund equity and option trading strategies short biased funds lose money when stock market grows. With equity hedge fundswhich are typically far from indexing or passive strategies it sometimes happens that their stock picking is simply very wrong — you surely can lose money even when the market as a whole goes up.
Furthermore, you often see hedge funds with very concentrated portfolios. Then you are exposed to high specific risk of that one company or security. Few years back Einhorn had a similar bearish battle with Allied Capital. David Einhorn has written a book about his trading views and approach: Fooling Some of the People All of the Time: A Long Short Story. Though his Greenlight Capital is officially a long-short value fundEinhorn became hedge fund equity and option trading strategies mainly thanks to his successful bearish trades.
Another name which comes to my mind here is the most famous investor in the world, Warren Buffett. His Berkshire Hathaway is technically not a hedge fund, but its trading approach, though long-only, is very close — thorough and own research of the fundamentals and very concentrated portfolio. After all, the borderline between equity hedge fundsprivate equity fundsand holding companies is getting more blurred in the recent years.
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Equity Market Directional Hedge Funds. Are Hedge Funds Only for the Rich?
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