All hedge funds are not alike. They may be subdivided into general categories that are defined by the types of investments the fund makes. And they may be differentiated by the strategy or strategies the fund uses in making its investments. The categories aren't fixed, though, and you may find funds grouped in different ways or the groups given different names.
For example, some hedge funds are described as event-driven. That means they seek opportunities to profit as the result of a specific event, such as a merger, acquisition, or bankruptcy. Other categories include funds that take the classic equity long/short positions — which is where hedge funds started — funds that invest in managed futures, and funds that invest in fixed-income products, convertible bonds, or currencies.
Leverage
Most hedge fund strategies involve leverage, or borrowing, which magnifies the level of risk at the same time that it enhances the return potential. For example, if a fund borrows 200% or more than its own capital investment, a sharp rise in interest rates could trigger an increase in the lenders' margin requirements. Or the lenders might force the fund to pay down its debt, which could aggravate losses, as the fund would probably be forced to sell investments to meet its financial obligations.
Absolute return
An absolute return strategy focuses on achieving a particular range of return regardless of the prevailing market return. This means that in bear markets an absolute return strategy would yield higher-than-market returns, but in bull markets, or good times, the strategy would produce returns below the standard benchmarks. Mutual funds, in contrast, typically measure their performance in relation to a public benchmark. The return on a large-company fund, for example, may be considered strong or weak in relation to the performance of the Standard & Poor's 500 Index.
For example, some hedge funds are described as event-driven. That means they seek opportunities to profit as the result of a specific event, such as a 