The Major Strategies, Explained

Finance 101 introduced hedge funds as flexible-mandate buy-side vehicles. This chapter covers what that flexibility actually looks like in practice: the major, genuinely distinct strategy types.

Long/short equity: the classic starting point

A long/short fund buys stocks it believes will outperform (long positions) and simultaneously shorts stocks it believes will underperform (short positions), profiting from the spread between the two, not just overall market direction. A fund can be structured market-neutral (longs and shorts roughly offsetting, so overall market moves matter little) or carry a directional tilt (net long or net short, discussed in the next chapter's exposure math).

Worked example: a fund goes long $10M of Stock A and short $10M of Stock B, both in the same sector. The sector falls 5% overall, but Stock A (the better company) only falls 2% while Stock B falls 9%. Long P&L: $10M × (−2%) = −$200,000. Short P&L: −$10M × (−9%) = +$900,000 (a short position profits when the shorted stock falls). Net P&L: −$200,000 + $900,000 = +$700,000, a real profit generated despite the whole sector falling, because the position was about relative performance (A vs. B), not the sector's direction.

Global macro: betting on the big picture

Macro funds trade based on top-down views on interest rates, currencies, and broad economic trends, directly using Finance 101's Central Bank Room-style analysis (rate differentials, growth outlooks, risk sentiment) as the actual investment thesis, expressed through bonds, currencies, and index-level equity or commodity positions rather than individual stock-picking.

Event-driven: trading around specific corporate events

Merger arbitrage (the very first deep dive in this course's foundational section) is the classic example: buying a target below the offer price, betting on deal completion. Other event-driven strategies include distressed debt (buying the bonds of a company in or near bankruptcy, betting on a better-than-priced-in recovery once the restructuring is resolved) and special situations (spin-offs, restructurings, other corporate events creating a temporary, exploitable mispricing).

Quantitative/systematic: letting models make the decisions

Rather than individual analyst judgment, quant funds run systematic models, often using the factor concepts from Finance 101's factor-investing deep dive (value, momentum, quality) applied algorithmically across thousands of securities at once, executed and rebalanced with far less individual human discretion per trade than a fundamental long/short fund.

Credit-focused strategies

Beyond distressed debt specifically, credit hedge funds trade the full range of corporate credit (investment grade, high yield, and structured credit), often expressing views through the credit-spread mechanics from Finance 101, sometimes combined with derivatives (credit default swaps) to express a view without owning the underlying bond directly.

Why the strategy actually matters for understanding a fund's risk

Two funds with identical historical returns can carry completely different real risk profiles depending on strategy. A market-neutral long/short fund and a directional macro fund can post the same headline return in a given year through entirely different, non-comparable paths, which is exactly why real due diligence (covered in the Equity Research track's manager-research-adjacent material) always starts with genuinely understanding the strategy before ever looking at the return numbers themselves.