Hedge funds also use futures and forward contracts to hedge or take positions on market direction. These derivatives are available for all markets; stocks, bonds, commodities and currencies. They are traded through brokerage firms and require the use of a margin account, which allows for leverage via loans from the broker. The buyer of a futures contract has the right to buy (sell) a fixed amount of the underlying asset at a fixed price on a fixed date. For example, the buyer of a futures contract on 100 pounds of silver at $5.0/ounce for a contract that matures in three months’ time would make a profit if the price of silver is above $5.0 on expiration by buying the silver at $5.0 via the futures contract and selling it at the market for the market price. If the market price is $5.50, the futures buyer would have a $0.50 profit on each ounce of silver.
E.
Hedge Fund Strategies
There are multiple classifications for hedge fund strategies. Broadly, hedge funds can be grouped into five strategy buckets: equity hedge, event driven, macro, relative value and multi-strategy. Equity hedge managers construct portfolios consisting of long and short position in equities. Event driven managers invest in various securities with exposure to changes in a corporation’s lifecycle (such as bankruptcy or an acquisition). Macro managers invest opportunistically in a wide range of financial assets and markets. Relative value managers take long and short positions in attempt to exploit perceived mispricing. Multistrategy managers allocate their capital to multiple hedge fund strategies through direct management, third party funds or subadvisory relationships.
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