If you invest in hedge funds, you know that there are many different strategies one can use to invest. In fact, there are about 14 investment strategies that one can use for hedge funds.
In addition, with the many different types of hedge funds out there, it can be difficult to understand what strategies work the best. While every hedge fund is unique, there are strategies for investment that are considered highly volatile, making them unpredictable for the future, and strategies that are low in volatility, meaning that they are less of a risk for you. Here are the hedge fund strategies that are likely to provide you with the least risk.
1. Income Strategy
In the income strategy, the focus of the investment is on current income, not just capital gains. The leverage in this strategy can often be used for buying bonds. In addition, leverage can be used to purchase fixed income derivatives that will provide a profit. This strategy is low in risk.
2. Market Neutral
Market neutral strategies, which come in the form of both arbitrage and securities hedging, are low in risk. The arbitrage strategy involves eliminating risk by utilizing offsetting positions, which frequently come from the same issuer. In the securities hedging strategy, the investment is placed in equal portfolios that are long and short, both in the same market sector.
The long and short strategy involves buying stocks that are undervalued or selling stocks that are undervalued. This strategy is similar to securities hedging, but it is not market neutral. Furthermore, the long and short strategy allows investors to see returns as the market rises but eliminate the risk involved, making it very low in volatility.
4. Value Strategy
The value strategy has a low to moderate risk. In this hedge fund strategy, the investor places his or her money in securities that appear to currently be selling for a very discounted price. These securities are not popular at the time of investment, but they are expected to increase in value over a long period of time.
5. Distressed Securities
In the distressed securities strategy, risk is also low to moderate. This involves purchasing debt, equity, or trade that is currently deeply discounted because of either restructuring of the company or bankruptcy. The goal of this strategy is for the company to reemerge in the market and become profitable. This strategy can be risky depending upon the success of the company.