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.