Every hedge fund strategy this module covers answers the same question differently: where, specifically, does the return come from, and what, specifically, kills it? Hold that question through all five, because it is also the mastery-check's real subject.
What are the five hedge fund strategies?
- Equity long/short: buys shares expected to outperform, shorts shares expected to underperform, and controls how much net market exposure the resulting book carries. Return driver: stock-picking skill (or factor tilts) on both sides of the book. Characteristic risk: a "short squeeze" (a heavily shorted stock rallying hard, forcing shorts to cover at a loss) and factor crowding (many funds short the same names for the same reason, so they all lose together).
- Event-driven: takes positions around a specific corporate event: a merger, a spin-off, a bankruptcy, an activist campaign. Merger arbitrage, the archetype, buys the target and (in a stock deal) shorts the acquirer to capture the announced deal spread. Return driver: the deal closing on schedule. Characteristic risk: the deal breaking (financing falls through, antitrust blocks it, a competing bid disrupts it), which usually costs far more than the spread being captured pays.
- Global macro: takes directional positions in the world's most liquid markets (FX, sovereign rates, commodities, equity indices) based on a top-down view of growth, policy, and capital flows, expressed discretionarily (a portfolio manager's judgment) or systematically (rules and models). Return driver: correctly anticipating a macro regime shift before it is priced in. Characteristic risk: being early, or a crowded trade unwinding violently when consensus flips (M7.06's carry-trade worked example shows exactly this shape).
- Relative value: takes near-simultaneous long and short positions in related instruments to harvest a mispriced spread between them, largely hedging away the shared directional risk: convertible-bond arbitrage, capital-structure arbitrage (a company's bonds versus its equity), fixed-income relative value (a swap spread, an on-the-run/off-the-run bond basis), and statistical/pairs arbitrage. Return driver: the spread converging (or being harvested repeatedly as it oscillates). Characteristic risk: the spread widening before it converges, especially under leverage, the position was "right" but the fund could not survive long enough to be paid for it.
- Managed futures / CTAs: commodity trading advisors running largely systematic, rules-based strategies (trend-following above all) across a diversified basket of liquid futures: rates, FX, equity indices, commodities. Return driver: markets trending more often than pure noise would predict. Characteristic risk: choppy, range-bound markets with no sustained trend, which is the single worst environment for every trend signal at once.