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Hedge Fund Strategies: Tactical Trading and Relative Value

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Global Macro

Global macro managers make in-depth analyses of macroeconomic trends in order to arrive at their investment strategy, taking positions on the fixed-income, currency and equity markets through either direct investments or futures and other derivative products.

Hedge funds utilizing a global macro investing strategy take sizable positions in share, bond or currency markets in anticipation of global macroeconomic events in order to generate a risk-adjusted return. Global macro fund managers use macroeconomic ("big picture") analysis based on global market events and trends to identify opportunities for investment that would profit from anticipated price movements. While global macro strategies have a large amount of flexibility due to their ability to use leverage to take large positions in diverse investments in multiple markets, the timing of the implementation of the strategies is important in order to generate attractive, risk-adjusted returns. Global macro is often categorized as a directional investment strategy.

Global macro strategies can be divided into discretionary and systematic approaches. Discretionary trading is carried out by investment managers who identify and select investments; systematic trading is based on mathematical models and executed by software with limited human involvement beyond the programming and updating of the software. These strategies can also be divided into trend or counter-trend approaches depending on whether the fund attempts to profit from following trends (long or short-term) or attempts to anticipate and profit from reversals in trends.

Within global macro strategies, there are further sub-strategies including "systematic diversified", in which the fund trades in diversified markets, or "systematic currency", in which the fund trades in currency markets. 


CTA stands for Commodity Trading Advisor and is also known as a Managed Futures strategy. This strategy essentially invests in futures contracts on financial, commodity and currency markets around the world. Trading decisions are often based on proprietary quantitative models and technical analysis.

CTAs trade in commodities (such as gold) and financial instruments, including stock indices. In addition they take both long and short positions, allowing them to make profit in both market upswings and downswings.

Emerging Markets

Emerging markets' trading strategies include global macro and CTA managers who rapidly adjusts the risk profile of a portfolio to short term market conditions, regardless of long term convictions, with a bias on emerging markets. Such tactical moves can be made either judgementally or with a systematic approach, and may be based on a wide range of data, from economic fundamentals to pure technical indicators.

"Emerging markets" funds focus on emerging markets such as China and India.



Relative value arbitrage strategies take advantage of relative discrepancies in price between securities. The price discrepancy can occur due to mispricing of securities compared to related securities, the underlying security or the market overall. Hedge fund managers can use various types of analysis to identify price discrepancies in securities, including mathematical, technical or fundamental techniques. Relative value is often used as a synonym for market neutral, as strategies in this category typically have very little or no directional market exposure to the market as a whole.

Other relative value sub-strategies include:

  • Fixed income arbitrage: exploit pricing inefficiencies between related fixed income securities.
  • Equity Arbitrage:exploit price differences by buying and selling shares of the same or similar stock with the goal of making a net profit on the transaction.
  • Convertible arbitrage: exploit pricing inefficiencies between convertible securities and the corresponding stocks.
  • Asset-backed securities (Fixed-Income asset-backed): fixed income arbitrage strategy using asset-backed securities.
  • Statistical arbitrage: identifying pricing inefficiencies between securities through mathematical modeling techniques
  • Volatility arbitrage: exploit the change in implied volatility instead of the change in price.
  • Yield alternatives: non-fixed income arbitrage strategies based on the yield instead of the price. E.g. Real Estate strategies, Energy Infrastructure strategies.
  • Regulatory arbitrage: the practice of taking advantage of regulatory differences between two or more markets.

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