Top 3 hedge fund strategies that you can implement today

Last Updated on May 23, 2023

Hedge funds are compelling investment vehicles that require considerable investment to operate. Some of the strategies used by hedge fund managers including High Frequency Trading and arbitrage methods are impossible for the average trader to employ because of costs and time restraints. But there are other strategies that hedge fund managers use that average traders can employ to their advantage. Let’s discuss the top 3 strategies average investors can copy from large hedge funds.

Scalping as a popular alternative to hedge fund strategies

There are several general strategies used by technical traders and they could be divided into intraday trading strategies and day trading and swing trading strategies. Scalping is a very popular intra-day trading strategy that aims to open several positions during the trading day and relies on making many small profits.

Scalping can be very profitable as it can limit the time a trader is exposed to market risks as all positions are closed very fast. The best moving average crossover for 1 minute chart is one of the scalping methods that rely on several moving averages with low and high periods called slow and fast moving averages.

When a fast-moving average crosses above the slow-moving average that can indicate an uptrend and the trader may enter a long position meaning to buy the security or pair. In scalping methods, traders tend to open and close trades manually as the time the position is opened is very short, and using stop loss and take profit may not be viable. Scalping is not the same as HFT or High Frequency Trading as HFT strategies require trading operations within milliseconds that can only be done by trading algorithms and powerful computers.

Scalping is a flexible middle ground between HFT and day trading and offers traders the ability to quickly scalp markets for small profits. Another good way to scalp markets is to use fundamental indicators. This strategy is very intuitive and simple to use. Traders by knowing the key news about companies can target their stocks and sell when bad news is upcoming or buy if earnings and other stock fundamentals are positive. Let’s switch to the top 3 strategies that can be copied from hedge funds with low budgets.

3. Long-short equity trading strategies

The long-short approach is a method in which investors and traders go long and short on two competing companies in the same industry based on their valuations. To make it more simple, let’s discuss an example. If Ford looks cheap relative to Tesla, traders might buy 1 lot worth of Ford and short equal value of Tesla stocks. If Ford outperforms Tesla the investor will make money no matter what happens to the overall market.

If the trader is wrong, however, they will lose money. If the trader’s prediction is successful and Ford rises 20% and Tesla rises 27%, the trader can sell Tesla for 127 000 and cover Ford short for 120 000 making a 7k net profit. Since this strategy is not for beginners it is placed on the 3rd in our top 3 strategies.

2. Global Macro

By analyzing the fundamental indicators and their potential impact on currencies, stocks, and other traders can anticipate what security will do and enter in the direction of a trend. This is a simple and intuitive approach. Fundamental analysis can be used to anticipate market reaction to important macroeconomic events like interest rates, inflation, monetary policy, employment rate, etc.

if a trader sees that the inflation is decreasing it means the currency will strengthen its value and it can be used as a signal to invest in the fiat currency. For example, if the Fed increases interest rates and inflation is falling, traders can use this information to short the EURUSD FX pair and make a profit from the weakening EUR. When inflation rises the stock market tends to go bullish and vice versa. All this analysis can be conducted by knowing the Fed’s decision on interest rates.

Using fundamental analysis to scalp markets can be a very profitable trading method, but scalping stocks can be a risky endeavor without proper knowledge and understanding. So it is always better to know how to read news and then use technical analysis to catch the movements caused by fundamentals.

1. Short-Only

This approach is the best for professional pessimists as fear is a very powerful emotion and bearish trends are often more powerful than bullish markets. When something bad happens to a stock or it is overpriced it may be a good time for thinking about short-selling it. Short selling is possible with stock CFDs as they are the best speculative derivatives.

The short-only method is first on our list because of how it simplifies the trader’s job to catch movements. If a trader has to only watch for one setup it will be much easier to learn and master. And since the fears are more powerful than greed it is possible to catch many strong downside movements or corrections especially if they are supported by pessimistic fundamental news.

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