October 21, 2006
Strategizing Volatility
The past few weeks saw so much activity on the hedge fund front, it felt more like the nail-biting finale of a thriller rather than the mundane world of finance. I know hedge funds are anything but mundane. But I’d be lying if I said that the Amaranth collapse had me gripped. Would the market collapse? What would other fund managers do? What strategies would they employ? … too many questions.
It was around this time, I realized that not everybody understands hedge fund strategies. I know you must be wondering if you really need to know about hedge fund strategies. Well, one of the simplest and most basic reasons to study them is because it helps you know the difference between various hedge funds. Investment returns, volatility, and risk vary largely among the different hedge fund strategies.
There are some strategies, which are not correlated to equity markets and are yet capable of delivering consistent returns with extremely low risk of loss. And then, there are others that may be as or more volatile than mutual funds. In case you want to have a successful run in the industry, you should be able to recognize these differences and blend various strategies and asset classes together to create a more stable long-term investment return.
Most hedge funds primarily aim to reduce volatility and risk while at the same time preserving capital. And irrespective of the market conditions, they want to consistently deliver positive returns. This is quite a tall order and hence it makes it doubly interesting to know how you can manage the volatile with the stable to ensure consistent returns.
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