Hedge funds use diverse strategies, including global macro, event-driven, relative value arbitrage, and long/short approaches, to generate returns while managing risk. What are the top hedge fund strategies in 2025?
Hedge fund strategies are different methods investors use to try and make profits while keeping risks as low as possible. These strategies often involve advanced techniques such as short selling (betting that a price will go down), derivatives trading (using complex financial contracts), and leveraging (borrowing money to increase potential returns). The goal is to perform better than traditional stock market indices.
Hedge funds use a wide range of approaches, from analysing global economic trends to event-driven strategies like merger arbitrage (investing in companies involved in mergers). By taking advantage of market inefficiencies, hedge funds aim to generate higher returns, making them an important part of modern investment management for experienced investors.
Like mutual funds, hedge funds manage pooled money from different investors. However, they differ from mutual funds in key ways. Mutual funds mostly serve retail investors (individuals investing smaller amounts), while hedge funds often cater to high-risk institutions and high-net-worth individuals (HNIs). These funds are usually more flexible in their investment choices and risk-taking, allowing them to create specialised investment structures. In addition, hedge funds are subject to fewer regulations compared to mutual funds, giving them greater freedom in their investment strategies.
A hedge fund is an investment fund that collects money from multiple investors and invests in assets that can be easily bought and sold. It uses advanced trading strategies and risk management methods to improve investment performance and protect returns from market risks. Some of the key techniques used by hedge funds include short selling (betting that prices will go down), leverage (borrowing money to increase potential returns), and derivatives (complex financial contracts).
Different types of hedge fund strategies
Hedge funds use different strategies to try and make profits, often by predicting market trends and price changes. Below are some of the main strategies they follow:
- Global macro strategies
- Directional hedge fund strategies
- Event-driven hedge fund strategies
- Relative value arbitrage strategies
- Long/short strategies
- Capital structure strategies
Global macro strategies: This strategy is based on large-scale economic trends across the world. Fund managers study things like interest rates, currency movements, economic cycles, and demographic changes. They use different financial tools, such as currencies, futures, options, stocks, and bonds, to take advantage of these trends. Some funds rely on human judgment (discretionary), while others follow computer-based models (systematic). One well-known global macro hedge fund is Bridgewater.
Directional hedge fund strategies: This strategy involves betting on whether markets will go up or down. Fund managers look at trends, market patterns, and price movements to decide if they should invest in a way that benefits from rising or falling prices. Common examples of this approach include long or short equity hedge funds and funds that focus on emerging markets.
Event-driven hedge fund strategies: This strategy takes advantage of price movements caused by major corporate events. Fund managers look for opportunities in situations such as company mergers, acquisitions, bankruptcies, and restructurings. The aim is to profit from changes in a company’s value due to these events. Sub-strategies include distressed securities (investing in struggling companies), risk arbitrage (merger-related investments), and special situations.
Relative value arbitrage strategies: This strategy focuses on differences in prices between related securities. Fund managers look for cases where two securities are priced incorrectly in relation to each other and invest based on the expectation that their prices will adjust over time. This includes approaches like fixed income arbitrage (bond price differences), equity market neutral strategies (balancing long and short stock positions), convertible arbitrage (mispriced convertible bonds), and volatility arbitrage (betting on price fluctuations).
Long/short strategies: In this strategy, managers invest in two competing companies within the same industry. They buy shares (go long) in the company they believe will perform better and sell shares (go short) in the one they think will underperform. For example, if a manager believes Coca-Cola will do better than Pepsi, they will buy Coca-Cola shares and sell Pepsi shares. This way, the strategy can make money regardless of whether the overall market rises or falls, as long as Coca-Cola performs better than Pepsi.
Capital structure strategies: This strategy involves looking at the different types of securities issued by a single company, such as its debt (bonds) and equity (shares). Fund managers try to find mispriced securities within a company’s capital structure. For example, if they think a company’s debt is overpriced, they might sell (short) the debt while buying (going long) the company’s shares. The goal is to profit when the prices of these securities move back into a more logical balance.
Final thoughts
Hedge funds employ diverse strategies to achieve their investment objectives. Each approach comes with its own set of risks, complexities, and opportunities. From the fundamental analysis of long/short equity to the sophisticated algorithms of quantitative funds, the choice of strategy often depends on the manager’s expertise, market conditions, and investor goals.
Understanding these strategies helps investors make informed decisions about where to allocate capital, while managers continuously innovate to navigate the complexities of global financial markets.
Himani Verma is a seasoned content writer and SEO expert, with experience in digital media. She has held various senior writing positions at enterprises like CloudTDMS (Synthetic Data Factory), Barrownz Group, and ATZA. Himani has also been Editorial Writer at Hindustan Time, a leading Indian English language news platform. She excels in content creation, proofreading, and editing, ensuring that every piece is polished and impactful. Her expertise in crafting SEO-friendly content for multiple verticals of businesses, including technology, healthcare, finance, sports, innovation, and more.
