Types of Hedge Funds

the securities are fairly risky and generally unhedged, these funds tend to
use little or no leverage.
Emerging markets hedge funds have been among the highest-
performing groups, although the category shows up as only average in
the performance data published by some data providers. The strategy
produces inconsistent returns, having one of the highest volatilities of
returns of all hedge fund strategies (about equal to an unlevered invest-
ment in the Standard & Poor's 500 index). The strategy is moderately
correlated to stock returns (around 50 percent versus the S&P 500). Like
most hedge fund strategies, the performance in emerging markets hedge
funds is correlated to the level of uncertainty in the financial markets.
For example, the strategy has a correlation of about 30 percent versus
the VIX index of stock option volatility (the funds do well when volatil-
ity declines).
Other Hedge Fund Strategies
With 8,000 or more hedge funds in existence, it is not surprising that they
do not fit neatly into a few categories. Other categories are important not
so much because of the assets committed to these strategies but rather be-
cause they extend the range of investment opportunities.
Global Macro
The global macro hedge funds brought the concept of hedge
fund trading to the attention of many investors for the first time. These
funds generally started out as equity portfolios but the managers also
traded debt and foreign currency. Despite being called hedge funds, these
funds generally take speculative, directional positions in stocks, bonds, and
currencies worldwide, based on macroeconomic forecasts.
Global macro hedge funds have some of the highest returns of all
hedge fund strategies. Nevertheless, the volatility of returns is (at least as a
group) lower than stock market volatilities but considerably higher than
most hedge fund strategies. Because these funds may take either long or
short positions and carry positions from a broad universe (including many
emerging markets), correlation to stock and bond returns is relatively low
(20 to 40 percent correlation to stock returns and 20 to 30 percent correla-
tion to bond returns). This group has a higher correlation to bond returns
than most hedge fund strategies.
Currency
Currency hedge funds may be seen as a particular kind of
global macro hedge fund. However, this group invests in currencies
Types of Hedge Funds
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