Hedge Fund

CHAPTER
4
Hedge Fund
Investment Techniques
D
espite the mystery surrounding hedge funds, they employ investment
techniques that are also used in traditional portfolio management, in
broker-dealers, or in commodity pools. In fact, many hedge fund managers
gained their expertise working in broker-dealers, mutual funds, or futures
funds. Therefore, the description of hedge fund techniques that follows in-
cludes discussion of methods that are not unique to hedge funds.
Hedge funds differ from other types of trading entities in many ways,
though, and, not surprisingly, have adapted techniques to their unique
needs. For example, a hedge fund can use leverage and has very few restric-
tions on applying risk management techniques. Hedge funds are able to
take either long or short positions in securities. Hedge funds face few re-
straints on the size of positions, characteristics of those positions, or issues
of investment style or strategy. Finally, hedge funds are free to apply a wide
range of techniques to create investment portfolios.
COMMON HEDGE FUND TECHNIQUES
Chapter 2 describes the most popular hedge fund strategies. This chapter
reviews some of the most popular hedge fund investment techniques, orga-
nized according to the type of hedge fund strategy mostly closely associated
with the technique. Hedge funds are free to adopt more than one of the
methods listed. Hedge funds of a particular style may also develop tech-
niques that differ from the following methods to improve return or to mod-
ify the types of risks to the investor.
Hedge funds use the investment techniques found in traditional invest-
ment textbooks and portfolio management textbooks. These traditional
methods are often divided into fundamental and technical techniques. Funda-
59
ccc_mccrary_ch04_59-72.qxd 10/6/04 1:42 PM Page 59