In part five we take an in-depth look at some more hedge fund strategies: tactical market timing, managed futures, quantitative, aggressive growth and a common hedge fund returns-boosting tactic – leveraging.
Tactical Market Timing
Tactical market timing strategists profit from movements in the market, allocating assets among different asset classes depending on the manager’s view of the market or economic outlook. Essentially this strategy means investing in assets beginning an up-trend while switching out of down-trend investments.
Using fundamental, economic and technical data, managers utilizing tactical market timing can profit in all market conditions. The key to profiting here is to have a firm grasp of the effects of market movement on each of the different classes of assets.
Managers using this tactic can use all available assets from stocks, mutual funds, derivative, indices, fixed income securities, and more. However, the volatility of this strategy is fairly high due to the inherent unpredictability of market movements and the difficulty of timing entry and exit from markets too.
Using this two-tiered strategy, fund managers invest in financial and commodities futures markets. Directional bets are made with long and/or short positions. The first tier of this strategy means combining short-term pattern recognition with a longer-term trend-following outlook. The second tier tracks and trades in over 60 markets around the globe, using a fully automated trend-following approach.
Managers specialising in managed futures are called Commodity Trading Advisors (CTAs).
This strategy involves the use of computer programmers, employed to scour through data and statistical models in order to seek out alpha that hide behind market abnormalities. Super high-frequency trading programs are required, and these programs are capable of buying and selling thousands of stocks or futures in an instant.
However, it’s not as straightforward as all that. These quant computer programs cannot always anticipate market commentary, and funds employing this strategy have made losses over the years as a result.
This is quite a high risk strategy that involves investing in equities that are expected to experience acceleration in growth of earnings per share. Often this means investing in smaller and micro cap stocks that are set for rapid growth, with generally high P/E ratios, and low or no dividends.
Funds using this strategy hedge by shorting stock indexes or by shorting equities where growth is expected to fall. This tends to be a ‘long-biased’ strategy, and includes sector specialist funds, including technology, biotech, and banking.
Not strictly a strategy, but this is a tactic that many funds use to increase potential profits. Leveraging basically means borrowing money, and it has resulted in spectacular returns – as well as spectacular failures.
When applied in a measured, reasonable way strong investment or trading returns are increased by the extra money that is put to work. When overdone, too much leveraging can force a sell-off as the fund receives margin calls and is left with no choice but to sell positions to meet them.
I am a writer based in London, specialising in finance, trading, investment, and forex. Aside from the articles and content I write for IntelligentHQ, I also write for euroinvestor.com, and I have also written educational trading and investment guides for various websites including tradingquarter.com. Before specialising in finance, I worked as a writer for various digital marketing firms, specialising in online SEO-friendly content. I grew up in Aberdeen, Scotland, and I have an MA in English Literature from the University of Glasgow and I am a lead musician in a band. You can find me on twitter @pmilne100.