Strategies explained

The largest category. Managers buy stocks they expect to outperform and short those expected to underperform. Shorts provide both alpha and a hedge. Returns depend on the spread between longs and shorts and on net exposure.

Event-driven funds invest around corporate events with identifiable outcomes: mergers, spin-offs, restructurings, activist campaigns.

Credit funds invest in bonds and loans, earning carry and capital gains. Distressed investors buy debt of troubled companies at deep discounts, betting on recovery value in restructuring, often taking control of the reorganised equity. The work is legal as well as financial: understanding the capital structure and creditor rights is the edge.

Macro managers trade interest rates, currencies, commodities and indices based on views on economies and policy. Positions are often leveraged through futures and options. Success depends on judging how policy and data will shift asset prices, and on cutting losses quickly.

Quant funds use systematic models to trade many instruments. Relative value funds exploit pricing differences between related securities — on-the-run versus off-the-run bonds, convertibles versus stock. Returns per trade are small, so leverage is common and risk management is everything.