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Hedge fund companies come in many types based on their investment styles, market exposures, management methods and more. Hedge fund companies usually employ a specific investment strategy as stated in their fund offering documents to investors. Investment strategies might also concern a vast variety of additional elements, including the types of securities, particular sectors and industries as well as trading instruments such as using derivatives or playing the underlying market. As a result, hedge fund companies can be classified in many ways that feature a combination of multiple investment characteristics. These characteristics might include a global-macro style or event-driven style, directional or market-neutral funds and systematic or discretionary funds, among others.
Two of the investment styles often used by hedge fund companies are global macro and event driven. Global-macro style refers to a fund’s following global economic trends to direct its investments among various markets: equity, fixed income, commodity and currency. Event-driven style pertains to a fund’s focusing on developing corporate events to go after investment opportunities in things such as mergers and acquisitions or bankruptcy restructuring. When combined with other investment considerations, a hedge fund company can be, for example, either a global-macro currency fund or event-driven, fixed-income fund.
Hedge fund companies can be directional or market-neutral based on their market exposures. Managers of directional hedge funds often bet on the direction of market price movements to either "long" or "short" the market. Maintaining larger risk exposures to the market, directional hedge funds hope to capture the upside of the market performance. Results might be volatile from time to time, but as long as there is an upward trend over the long run, directional funds can be a fit for investors who have higher risk tolerance and can afford to keep capital invested for a longer period of time.
Market-neutral hedge funds, or non-directional hedge funds, are hedge funds that actually hedge their investment positions. The funds often hold both long and short positions at the same time. Market-neutral funds strive to achieve steady investment returns by eliminating market risk, that is, giving up above-average returns in some years but also avoiding sub-par performances in other years. Market-neutral funds are more appropriate for investors who prefer lower risk and can accept returns that might not be high but are predictable.
The types of hedge fund companies can also be either discretionary or systematic, depending on the management methods that fund companies employ. Discretionary hedge funds use a more qualitative investment method by which investments are primarily hand-picked by fund managers. Systematic hedge funds, also known as quant hedge funds, rely more on a pre-designed, computerized system to select individual investments. Both investment methods can applied to funds of any category as classified under other investment features.