| Although there is no universally accepted | | | | (based upon computer models) or discretionary |
| definition of the term hedge fund, the term | | | | (ultimately based on a person). A hedge fund |
| has evolved over time to include a multitude | | | | may pursue several strategies at the same |
| of skill-based investment strategies with a | | | | time, internally allocating its assets |
| broad range of risk and return objectives. | | | | proportionately across different strategies. |
| The common element among these strategies is | | | | |
| the use of investment and risk management | | | | Hedge funds are often classified according to |
| skills to seek positive returns regardless of | | | | investment style including following |
| market direction. | | | | categories: relative value, event-driven, |
| | | | equity hedge funds, global asset allocators |
| Hedge funds are an exciting innovation to the | | | | and short selling. Within each style |
| range of professionally managed investment | | | | category, funds are then classified according |
| vehicles that have brought sophisticated | | | | to the underlying markets traded. For |
| investment strategies and a new sense of | | | | example, within the relative value style |
| excitement to the investment community. They | | | | classification, there are a number of |
| can serve as an important risk management | | | | sub-groups, including equity market neutral, |
| tool for investors by providing valuable | | | | fixed income arbitrage, convertible |
| portfolio diversification. One might define a | | | | arbitrage, credit arbitrage and statistical |
| hedge fund as an information-motivated fund | | | | arbitrage. |
| that hedges away all or most sources of risk | | | | |
| not related to the price-relevant information | | | | Various hedge fund return opportunities stem |
| available for speculation. | | | | from the expanded universe of securities |
| | | | available to trade and the strategies that |
| Hedge funds use a wide variety of investment | | | | can be employed. Funds can access both |
| styles and strategies. Even among hedge funds | | | | financial and non-financial (commodity) |
| that purport to use the same investment | | | | markets and can easily take long, short, |
| strategy or invest within the same asset | | | | spread, and option positions in any of these |
| class, there is a wide range of investment | | | | markets. Expanding the set of investment |
| activities, performance and risk levels. | | | | opportunities results in providing |
| Because the investment activities of hedge | | | | diversification benefits to a portfolio that |
| funds are so diverse, the hedge funds | | | | cannot be replicated through traditional |
| assigned to a particular investment category | | | | stock, bond, and real estate investment |
| are likely to exhibit less similarity than | | | | strategies. |
| more traditional investment vehicles, such as | | | | |
| registered investment companies. | | | | For alternative investments, such as hedge |
| | | | funds, to grow as an investment alternative, |
| The investment strategies are typically | | | | individuals need to increase their knowledge |
| designed to protect investment principal and | | | | and comfort level as to their use in |
| engage in a variety of investment techniques | | | | investment portfolios. The logical extension |
| that include fixed income securities, | | | | of using investment managers with specialized |
| convertible securities, currencies, | | | | knowledge of traditional markets to obtain |
| exchange-traded futures, over-the-counter | | | | maximum return/risk tradeoffs is to add |
| derivatives, futures contracts, commodity | | | | specialized managers who can obtain the |
| options and other non-securities investments | | | | unique returns in market conditions and types |
| in order to generate specific risk-return | | | | of securities not generally available to |
| profiles. | | | | traditional asset managers; that is, hedge |
| | | | funds. In addition, investors must compare |
| Strategies may be designed to be | | | | the unique returns available to each of the |
| market-neutral (very low correlation to the | | | | hedge fund styles to insure that the |
| overall market) or directional (a "bet" | | | | particular style does not duplicate existing |
| anticipating a specific market movement). | | | | investment opportunities. |
| Selection decisions may be purely systematic | | | | |