TECHNIQUES USED BY HEDGE FUNDS
Distressed Debt Investing
Such investors look for a silver lining in a company where the debt touched its lowest. Two things: the entity filed a Chapter 7 bankruptcy in which the derivatives become valueless or Chapter 11 in which it continues operating under a reorganization scheme approved by lenders. This strategy requires extensive research and convincing the borrowing firm to bolster cash flow and improve operations.
Case in point: The Third Avenue Focused Credit fund accumulated tons of debts following the 2008 financial imposition. When it suffered downfall last year, the assets lost their ground that even huge investment management firms did not purchase those.
Hedge funds seek to capitalize on corporate events such as asset sales, merger arbitrage, restructurings, and spinoffs. Basically any occurrence that ignites change in a firm. This type of investing is somewhat interesting, being perceived as an easy money. However, it is a high-risk venture since many unexpected obstacles may derail the conclusion of a planned company event.
Case in point: Williams Companies and Energy Transfer Equity unveiled a $38 billion merger deal in September 2015. Given the intricacies of its terms and news reports that Energy Transfer Chief Financial Officer Jamie Welch left the company took its toll on both companies’ stocks. It declined more than 35% and placed them in a not-so-favorable position.
Leaning on "go anywhere" orientations, this kind of investing entails mastering the brass tacks of different markets. Macroeconomic trends are evaluated and the fund invests in various asset classes such as bonds, currencies, commodities, and stocks. Also, several funds use considerable amount of leverages. But not all investors can grasp and assimilate the complexities of multiple markets.
Case in point: Performance of macro funds were pulled down during the 2009 bull market. At that time macro fund legend Paul Tudor Jones complained about insufficient volatility in the major asset classes, saying macro traders befriend it.
Selling Short Momentum Stocks
Short selling stocks which have reached its momentum is a perilous technique.
Case in point: William Ackman lost a short bet against Herbalife. Considering the entity a fraud, he started the position in 2012 and the firm in question tripled in the following year. His Pershing Square Capital Management fund, as a result, sustained multiyear losing streak.
Some analysts and investors consider it a classic display of ossified persistence under pressure or reckless audacity accounting the extent of the losses.
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