Hedge funds can be categorized, not only according to the investment strategies used by them, but by the different types of the funds as well (Types of Hedge Funds, Holborn Assets Limited). The different types of hedge funds are:
- Convertible arbitrage: These hedge funds try to exploit the abnormalities between the relevant price of the stock and the prices of the financial instruments that are convertible into stock.
- Distressed securities: Investing in assets that are on the verge of bankruptcy and have lost quite a substantial portion of their relative value can be exploited to the advantage of the investor.
- Emerging markets: As explained below, these hedge funds focus on markets that are still developing and have great potential to grow in the near future.
- Fixed income arbitrage: These hedge funds attempt to predict changes in the prevalent credit ratings or the term structure of the interest rates. By offsetting long or short positions, managers can be assured of a largely market neutral position.
There are many more different types of hedge funds and the strategies of hedge funds, however, those are all explained below in greater detail.
These are the most common hedge funds in use today by many investors. The second important thing to know about hedge funds is some of the most prominent hedge fund strategies that are used and what they mean.