Absolute Return Strategies

The below strategy descriptions are used in the Australian Fund Monitors database to assist users in identifying and comparing funds, however these descriptions are by no means definitive. Given the undefined and heterogeneous nature of the industry note that some funds may operate across more than one strategy, while others may not fit perfectly into any strategy, and over time funds may experience 'style drift' from one strategy to another.

Equity Based Strategies

Equity Long/Short funds invest on both long and short sides of markets and may be focused on particular sectors, regions or market capitalisation. They generally have a long bias where short positions are used to hedge some market risk. Leverage may be used but the majority of the returns are achieved from stock selection.

Equity Market Neutral funds target beta (i.e. market risk) neutral returns typically by leveraging long and short positions in matched equity portfolios. Neutrality can be targeted on a market-cap, sector and dollar basis. This strategy attempts to profit from pricing inefficiencies between various equities and is often referred to as "Statistical Arbitrage" or "Pairs Trading" where two correlated stocks are traded simultaneously on a relative basis i.e. the oversold (or undervalued) stock is bought while the overbought (or overvalued) stock is sold.

Equity 130/30 funds target 130% gross long exposure and 30% gross short exposure over time. Short share exposure is gained by borrowing shares from the Prime Broker and then selling the borrowed shares in the market. Cash proceeds from the sale of short shares are used to gain extra long exposure on other shares.

Equity Buy Write funds seek to purchase listed equities and then selectively "write" or sell exchange traded call options over these stocks in order to provide additional income to the portfolio. These funds may also utilise risk management processes including the purchase of put options or other derivative positions in order to limit the potential impact of extreme adverse market events.

Equity Long funds invest in or trade equities on the long-side only in the anticipation the stock price will rise and the investment will appreciate. Stocks are usually selected on the basis of value or growth. Value stocks are bought where there is a perceived mismatch of price compared to intrinsic value and will often include "blue-chips". Value stocks will usually be trading at low price-to-earnings (P/E) ratio and/or paying high dividends. Growth stocks are bought on their perceived potential worth and will often include "green-chips" or small-to-mid caps (i.e. capitalisation). Growth stocks will usually be trading at high P/E ratios and paying low or no dividends.

Equity Income funds invest in cum-dividend stocks and sell them when they go ex-divided with the objective of earning dividend income and franking credits. Often the portfolio will be hedged with the use of equity derivatives.

Dedicated Short funds maintain a net short bias by shorting equities and/or derivatives with the intention of buying them back later at a lower price. This strategy will often utilise the same stock selection processes as long-only funds but seek to identify and short overvalued/overbought stocks.

Event Driven funds aim to exploit anticipated corporate events, these funds typically focus on risk arbitrage, distressed securities, private capital raisings, and high yield investing.

Merger Arbitrage funds aim to profit from M&A (i.e. merger and acquisition) activity by shorting stock in the bidding company while buying stock in the target company hoping to profit from the spread between the current market price and the ultimate purchase price paid for the target.

Convertible Arbitrage funds attempt to profit from the pricing anomalies between a company's convertible securities and their ordinary shares.

Non Equity Based Strategies

Real Estate funds invest or trade securities with exposure to real estate markets.

Fixed Income funds primarily focus on yield or current income earned on fixed income securities (i.e. bonds). These funds may utilise leverage to buy bonds and sometimes fixed income derivatives in order to profit from principal appreciation and interest income. They may also utilise arbitrage to limit volatility and generate profits from price anomalies between related fixed income securities.

Currency/FX funds aim to generate alpha by targeting price trends in currency pairs. This strategy originated as a sub-strategy of Global Macro.

Global Macro funds concentrate on major global macroeconomic trends or changes in government policies which affect a variety of markets including economies, currencies, commodities and interest rates. These funds invest or trade (both long and short) in a variety of securities and other instruments on a global basis.

Managed Futures funds invest in listed financial and commodity futures. These funds aim to generate alpha often through systematic or directional trading and exploiting market momentum techniques.

Commodities/CTA (or commodity trading advisor) funds target price trends in commodities.

Multi Strategy funds are characterised by their ability to allocate capital dynamically among several traditional hedge fund strategies adding a further layer of diversification.

Global Diversified funds are characteristically fund of hedge funds, where the underlying hedge funds invest in a variety of strategies across a number of geographic areas. Through this diversification these funds aim to achieve more stable long term returns.

Infrastructure funds invest in or trade securities with exposure to infrastructure sectors.

Volatility funds concentrate on volatility products which are investments that derive some of their value from the volatility of the underlying asset. The Fund will buy and sell such products, depending on their value, and will enhance or hedge positions by trading in related derivatives such as futures and options.

Credit funds invest in credit derivatives, credit index trading markets, CDO's and securitisation with the ability to take both long and short positions.