Scott Tominaga Provides a Brief Overview Of Hedge Fund Investing and Strategies

Over the last two decades or so, hedge funds have evolved from an investment vehicle meant for the wealthy and institutional investors to a valuable tool that helps investors across diverse financial landscapes in managing investment risk, diversifying portfolios and producing reliable returns. Scott Tominaga mentions that hedge funds were initially developed to help investors manage investment risk and boost their returns over time. The market-neutral or balanced approach of this investment tool helps seek out positive returns by opting to investing in varied instruments over long- and short-term periods.

A hedge fund can be described as an investment partnership between the fund manager and investors. This investment approach is focused on enabling an investor to enjoy commendable returns within a particular time period, while facing a reduced risk involvement. Scott Tominaga additionally points out that the level of profit or loss a person faces in this investment vehicle would largely depend on the strategy they choose. Hedge fund strategies largely came into existence as the purpose of this investment vehicle was to make money, regardless of whether there is a bull market or a bear. In this investment process, fund managers basically have to against losses by following a number of hedge fund strategies.

There are a number of popular hedge fund strategies that are used today, each of them having diverse levels of risk involvement for an investor. Here are a few of them:

  • Global macro strategies:  In such strategies, the fund managers make bets on the basis of major global macroeconomic trends. This may include shifts in interest rates, currencies and economic cycles. Ideally, discretionary and systematic approaches are used by fund managers in regards to financial and non-financial markets by trading options contracts, currencies, as well as traditional equities and bonds.
  • Directional hedge fund strategies: The fund managers bet on the directional moves of the market under this approach, as they ideally expect a trend to continue or reverse for a period of time. Here the managers have to analyze market inconsistencies, trends and movements, which subsequently can be applied to investments in vehicles like long or short equity hedge funds.
  • Event-driven hedge fund strategies: These strategies are used in scenarios where there are certain underlying opportunity and risk linked with an event. Basically, the fund managers identify investment opportunities in particular corporate transactions like recapitalization, liquidations, bankruptcy, acquisitions, and consolidations under this approach. Such transactional events largely form the basis for investments in special situations, risk arbitrage and distressed securities.
  • Relative value arbitrage strategies: This strategy takes advantage of relative price discrepancies between various securities whose prices the manager expects to converge or diverse over a span of time.  There are several sub-strategies present under this approach, including volatility arbitrage, convertible arbitrage, equity market neutral positions, and fixed income arbitrage.

Scott Tominaga points out an investor must dwell on their overall risk involvement and the amount of expected returns, prior to selecting the ideal hedge fund strategy for their investment.