Hedge funds as an asset class

Hedge funds are best described by a series of characteristics:

A focus on producing absolute, positive returns
The ability to ‘sell short’ and generate a positive return as the price of a security falls
Relatively few formal constraints and greater flexibility
Investment approaches vary widely, from highly focused and specialised investment strategies to hedge fund managers that trade a variety of securities across different asset classes and geographic regions
The returns depend on the expertise of the investment team, rather than the direction of the market
Managers apply varying degrees of leverage, depending on the investment strategy. No leverage is applied to some strategies, while in other areas, e.g. fixed income arbitrage, leverage is required to produce attractive returns for the investors
A strong alignment of interest between the hedge fund manager and the investors because of the performance related fee and personal money invested

The main hedge fund strategies

There are five main hedge fund strategies: