What different hedging strategies do hedge fund managers use?
Hedge funds follow a wide variety of hedging strategies. Examples include: • Arbitrage. An arbitrage strategy is based on identifying pricing inefficiencies in the market. For example, a money manager might buy long convertible bonds and short the underlying issuer’s equity. • Short-selling. Short selling is the practice of selling shares you don’t own with the expectation of buying them back at a lower price in the future. This technique is often used to reduce portfolio risk as part of an arbitrage strategy. • Leverage. The general partner borrows against the assets in the fund and invests the additional funds. When a fund is 100% leveraged, for example, every $1 increase in value results in a $2 return on equity. However, a $1 decrease in value would result in a $2 decrease in the return on equity. • Derivatives. Fund managers trade in options and other contracts whose values are based on the performance of underlying equities or other financial assets. Hedging strategies are typica
