Types of Hedge Funds

Size Shifts
The largest category of hedge funds contains mostly common stocks, al-
though they may pursue several different strategies. Although the first
hedge funds were also predominately equity funds, different styles have
come in and out of favor over the years.
For example, global macro hedge funds (see descriptions of this and
other styles later in this chapter) were very popular in the early 1990s, of-
fering high returns and high risk. Later in the same decade, various fixed
income arbitrage funds provided low risk and low returns; however, this
latter style went out of favor after several high-profile fixed income funds
suffered large losses. Investors are returning to equity strategies seeking
an attractive combination of moderately high returns and moderately
low risk.
Prevailing Trends
By 1990, the public had become aware of hedge funds, primarily be-
cause of the trading activity of the global macro hedge funds. These
funds were large, traded large positions, and frequently influenced mar-
ket prices. Figure 2.1 suggests part of the reason for this notoriety: This
Types of Hedge Funds
21
FIGURE 2.1
Hedge Fund Allocations by Style, December 31, 1990
Source: Tass Research.
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