Hedge fund strategies - a framework
Over the past years, a number of frameworks have emerged dividing hedge funds into several sub-categories, but the literature on the subject is still not in agreement on the number of distinct hedge fund investment styles. The frameworks of Trading and Sales Support (TASS) Investment Research, Hedge Fund Research (HFR), and HedgeFund.Net (HFN) are amongst the most widely recognized. All three frameworks are depicted below.
To give an idea of the complexity surrounding hedge fund strategies and style classification, two additional frameworks of the classification of hedge funds in the HFR and HFN database are depicted below. For visual purposes, a distinction is made between market directional and market neutral funds. It should be noted, however, that hedge funds belonging to the various sub-classifications may not be easily defined as strictly directional or market neutral. HFR includes 31 different sub-strategies and differentiates between four major classifications (Macro, Equity Hedge, Event Driven and Relative Value). HFN, on the other hand, accounts for 28 single manager strategies. Within HFN, the 28 sub-strategies are referred to as main strategies. No further information is given with respect to a broader classification. Addtional classifications for HFN are provided to facilitate the comparison of the two databases. The figure below shows the classification of hegde funds according to HFR.
It should be apparent that, whilst impossible to cater for all sub-strategies depicted, hedge funds may be classified according to four broad themes as defined in the HFR database: Equity Hedge, Event Driven, Macro and Relative Value. The sub-strategies of the HFN database are classified according to the HFR themes: Equity and Equity Market Neutral are joined to form the Equity Hedge category, Fixed Income strategies are subsumed under Relative Value, CTA/Managed Futures remain as a separate classification and all Multi-Strategy, Option Strategies and Short-term Trading funds are attributed to the classification Other. The remaining classifications Event Driven and (Global) Macro remain as they are.
Sub-classifications for FoHFs as follows: Conservative, Diversified, Market Defensive, Strategic. Light gray boxes indicate main strategies, white boxes indicate sub-strategies. Classification according to: hedgefundresearch.com. Note that differentiation between directional and market neutral funds is defined by the author.
While the frameworks above are not exhaustive, they incorporate the most common hedge fund investment styles. Many hedge funds, however, employ more than one investment style or a combination thereof. It should also be noted that Managed Futures, also referred to as Commodity Trading Advisors (CTAs), developed independently from hedge funds. It is thus questionable whether or not they should be included in a hedge fund classification framework.