Last updated on September 1st, 2025 at 10:34 am
Hedge funds are supplementary assets actively managed and frequently used as risky investing tactics. They raise money from investors and invest in securities or other assets to earn favourable returns. Hedge fund investing requires authorised investors to have a substantial minimum net worth or investment, and they charge higher fees than traditional investment funds. This blog will explore hedge fund strategies and investment banking partnerships.
Hedge funds are not regulated as rigorously as mutual funds and usually have greater discretion than mutual funds to explore investments and methods that can raise the risk of investment losses. They usually combine with investment banks to gain access to funds and insights. Investment banks can give hedge funds access to various financial goods and services, including funding, dealing, and research. In return, hedge funds can supply investment banks with a source of income through fees and charges.
Hedge Fund Strategies
Hedge funds employ strategies to insulate themselves against volatility in the stock or securities markets and earn a return on a small amount of operational capital without compromising their whole budget. The following are some of the most popular hedge fund strategies:
- Long/Short Equity Strategy: The most popular hedge fund strategy is the long/short equity approach. Equity hedges in the public markets balance long and short holdings, increasing return while lowering risk. The three main classifications are market neutral, long-short, and short-long positions.
- Market Neutral Approach: This strategy involves holding long and short positions in various assets to build a market-neutral portfolio. It indicates that the portfolio is more susceptible to the performance of specific assets and less susceptible to market risk.
- Merger Arbitrage: This tactic entails investing in businesses involved in mergers and acquisitions. The aim is to profit from the price discrepancy between the purchase and market prices once the merger or acquisition is complete.
- Convertible Arbitrage: With this tactic, one can buy convertible instruments like preferred shares or convertible bonds. The aim is to profit from the price discrepancy between the convertible instrument and the underlying stock.
- Capital Structure Arbitrage: This tactic involves purchasing several of the same company’s securities, including stocks, bonds, and options. The goal is to gain from the price differential between the two securities.
- Fixed-Income Arbitrage: With this strategy, one can profit from potential arbitrage opportunities in securities tracking interest rates. A savvy fund manager will take advantage of the fact that equities would become proportionately cheaper than bonds.
- Global Macro Strategy: By concentrating on wagers on interest rates, sovereign bonds, and currencies, this hedge fund strategy aims to profit from big economic and political shifts in prominent nations.
Common hedge fund strategies vary on the fund management, including equities, fixed-income, and event-driven goals. Hedge fund strategies use a variety of investments, like equity and debt securities, currencies, commodities, derivatives, and real estate, and employ an extensive spectrum of risk tolerance and investing principles.
Benefits of Hedge Funds and Investment Banking Collaborations
Collaborations between hedge funds and investment banking can offer several benefits:
- Diversification: Hedge fund co-investments can significantly increase the diversification of conventional portfolios. Co-investing can allow investors to focus on certain exposures and risk/return profiles matching their investment goals not existing in their portfolios.
- Attractive returns: Investors know the mutual advantages of the closer cooperation made possible by co-investing, which results in attractive returns.
- Increased returns: Hedge funds can concentrate their assets, use leverage, or engage in other strategies with the potential to increase returns.
- Career prospects: Both investment banking and hedge funds provide excellent career options, substantial salaries, and alluring exit strategies.
Predictions for the Future of Hedge Funds
The future of hedge funds is a topic of interest for many investors and analysts. Here are some predictions regarding the future of hedge funds:
- Adaptation to changing market conditions: Hedge funds showed resilience and adaptability in the face of market volatility and disruption brought on by the COVID-19 epidemic. Hedge funds will develop further as they adjust to declining costs, rely more on technology, and offer greater accessibility to regular investors.
- Better performance: Hedge funds performed well despite a poor public image; however, allocations were cut from over 40% in 2018 to barely 23% in 2020. Since hedge funds are actively managed, future performance can exceed expectations.
- Increased assets under management: Assets under management are predicted to expand significantly in 2023, driven by the largest increase in the preceding ten years.
- Significant potential for reinforcement: The performance of hedge funds can be considerably enhanced by the Post-Modern Cycle.
Conclusion
Investment banks use hedge funds to make money through fees and commissions, underwrite offers, and provide research and analysis for investment choices. With more investment options entering the market, a career in investment banking right now can offer great employment opportunities.
Knowing about strategies such as hedge funds is important in order to become an investment banker.
The Certified Investment Banking Operations Professional (CIBOP) course, designed by Imarticus Learning, offers excellent insight into the industry. This investment banking course provides an in-depth understanding of complex financial products and their trade life cycles, operational risk, and treasury and clearing divisions within an investment bank. Check out Imarticus Learning to kickstart your career in investment banking.
