What types of trading styles do hedge funds employ?

• A. Buy-and-hold index replication.
• B. Global Macro, long/short funds, and special situations funds.
• C. Day trading only growth stocks.
• D. Arbitrage only in currency markets.

Answer: (B)

Hedge funds are known for their flexibility and use a range of trading styles to pursue returns in different market conditions. Global Macro funds make bets based on broad economic trends across multiple markets and asset classes, taking long or short positions in currencies, bonds, equities, commodities, and more. Long/short funds focus on identifying specific stocks that will rise and those that will fall, using both long positions and short positions to capture alpha while aiming to balance risk. Special situations funds look for opportunities created by corporate events—such as mergers, restructurings, spin-offs, or distress—that can generate profits regardless of overall market direction.

This combination captures how hedge funds operate in practice, unlike strategies that are narrow or passive. A buy-and-hold index strategy is passive and aims to replicate a market index, not to actively pursue alpha. Focusing only on day trading growth stocks is too limited and not representative of the hedge fund spectrum. Limiting arbitrage to currency markets ignores the wide range of arbitrage opportunities across equities, fixed income, and other assets that hedge funds frequently exploit.