Hedge Fund Strategies
- Peak Frameworks Team
- Sep 24
- 5 min read
If you're interested in breaking into hedge funds, check out our Hedge Fund Course. Our courses have helped thousands of candidates land top jobs every year.
Overview
Hedge funds use many different strategies to generate returns. Some funds combine multiple strategies opportunistically which makes applying strict classifications to specific hedge funds difficult.
In this post, we will explore some of the most common strategies that hedge funds employ.
If you'd like to learn how to break into a hedge fund, we'll teach you how to build comprehensive models and stock pitches to nail your interview in our Hedge Fund Course.
Common Hedge Fund Strategies
Multi-Strategy
Mega funds like Citadel, Millennium, and Point72 run multi-strategy platforms. At the Chief Investment Strategy (CIO) level, the funds allocate capital across many pods and asset classes which can include fundamental equity investing, credit, and macro.
From the perspective of investors at the fund level, one of the primary benefits from this strategy is diversification which can lead to more stable returns. If one strategy or asset class underperforms, others can balance it out.
Career Considerations
As a junior starting out your career, working at a multi-strategy fund offers access to top-tier infrastructure and resources, and can provide opportunities to specialize within a specific coverage.
However, performance is generally judged on an extremely short-term basis which creates an extremely high pressure environment, and the risk of large drawdowns can lead to quick turnover in periods of underperformance.
Long/Short Equity
This is one of the most common hedge fund strategies. Hedge funds employing this strategy look to generate alpha on on price dislocations on both sides of a trade. Analysts look for undervalued stocks to buy (enter a long position), and overvalued stocks to sell (short).
Analysts working at long/short equity funds typically specialize by sector and develop deep expertise in industries such as technology or healthcare. This is a fairly intuitive strategy for investors to understand. There is risk of high correlation with equity markets.
Career Considerations
A career at a fund pursuing this type of strategy is great for people coming out of investment banking, private equity, or equity research, where prior sector expertise builds transferrable skills. It's worth noting that a high correlation to equity markets can lead to performance (and compensation) being tied to market cycles.
Equity Market Neutral
This can be thought of as a subset of the long/short equity strategy. This approach balances exposure to longs and shorts such that the portfolio has close to a zero net market exposure (zero beta).
This theoretically would limit the overall portfolio's correlation to the market such that price moves would be isolated to other factors or simply outperformance attributable to alpha. Some funds also seek multi-factor neutrality by using factor models to just isolate for alpha.
From the perspective of investors, this strategy limits exposure to broad market risk and can be be a great way to add diversification to a portfolio.
Career Considerations
Less exposure to market risk can create for opportunities to generate for high returns regardless of market moves. However, quantitative models may dominate intuitive analyst judgement which can be off-putting to some.
Event-Driven
This strategy focuses on trading around certain catalysts like mergers, spinoffs, bankruptcies, and other specific events that would reasonably lead to changes in asset prices.
An example of a trade would be buying a company that is trading below an announced deal price to benefit from the price dislocation reflecting expectations that the deal may be blocked or otherwise fall through.
York Capital is a fund that can be described as using this strategy among others. As mentioned on its website, the firm establishes "clear, distinct theses underlying mispriced situations" based on "the formation of catalysts over identifiable timelines".
Career Considerations
Focusing on this type of strategy can feel intuitive coming from a background in investment banking due to the clear link to corporate finance, M&A, and restructuring. However, this type of strategy might feel more cyclical as there may be fewer deals in down markets.
Global Macro
Funds that use this strategy invest around big-picture themes across moves in rates, currencies, commodities, and other catalysts related to policy moves. They invest across geographies and asset classes to generate returns.
For example, they might long bonds in a certain country ahead of interest rate cuts, or trade oil futures reflecting expectations surrounding the outcomes of certain geopolitical events. Firms like Bridgewater Associates are known to employ this strategy.
Career Considerations
It's intellectually exciting to be exposed to multiple asset classes and focus your work around big-picture ideas. However, there are fewer entry points for juniors especially coming from more traditional paths like investment banking.
Credit and Fixed Income
Oaktree and King Street are prominent funds in credit investing. An example of a trade following this strategy could be capital structure arbitrage where a fund takes advantage of inefficiencies stemming from mis-pricing of risk by taking opposite sides of the trade in senior and subordinated debt of the same company.
Another common approach would be distressed debt investing which involves buying securities in a firm's capital structure at deep discounts to face value in order to profit from the market's misjudgment of risk reflected in the price.
Career Considerations
Working within a credit fund could bema good fit for people with strong backgrounds in credit analysis, restructuring, or leveraged finance. Skills to succeeds as a junior in this strategy overlap with investment banking restructuring groups or roles in credit advisory and analysis.
Deal flow and opportunities are cyclical which means attractive investment opportunities ebb and flow with market conditions. Opportunities particularly spike during downturns when defaults rise.
Activist
Activist funds take concentrated positions in companies and push for operational change. This style can somewhat overlap with an event-driven strategy, but involves more of a direct role in shaping catalysts.
Prominent funds that employ this strategy include Pershing Square and some of Icahn Enterprises' operations.
Career Considerations
There are only a handful of funds that actively employ this strategy. Outcomes can take years to materialize relative to more traditional equity investing.
Quantitative
Quantitative strategies are highly scalable when they work. They rely on cutting-edge technology and models to generate returns which have low reliance on human judgement once infrastructure is set up, though returns can decay as signals get crowded.
Funds like Renaissance Technologies and Two Sigma rely on complex algorithms to generate returns through the arbitrage of market inefficiencies by sometimes trading thousands of securities daily.
Career Considerations
There are fewer roles especially for those with traditional finance backgrounds. There is intense competition for talent as firms look for people with exceptional math and science skills.
Summary
Hedge funds employ a variety of strategies from more intuitive pure-play stock picking approaches like long/short equity, to trading based on the recommendations of complex quantitative models. Some funds like Citadel and Millennium diversify their returns profile by enacting multiple strategies. Each strategy comes with its own set of benefits to investors (primarily diversification and exposure to unique opportunities) and trade-offs for professionals working within them.
