Background:

Hedge funds have its origin in 1949 when Alfred W Jones constructed a fund that used a new technique where he took long positions and hedged them with short positions. This fund got a large publicity when it was proved that it had outperformed any other fund by 87 percent during a ten year period. Though, it was not until the early 1990’s hedge funds became popular for the general public. The goal for hedge funds in general is to yield an absolute return and there are many different strategies for reaching this goal. This has lead to the following three research questions:

Have Hedge funds been able to reach its goal for an absolute return in both bullish and bearish times?

Which strategy has shown the best performance in markets on the rise and in declining markets and is it possible to place the different strategies in order of precedence?

Is it possible to come up with a guideline for investing in hedge funds on the Swedish market?

Purpose:

The purpose with this thesis is to study the returns on a large number of hedge funds in the American fund market based upon their investment strategy, both when the market is gaining and when it is declining.

Method:

In this thesis we have investigated twelve different strategies in the American market. By using secondary data from HFRI’s hedge fund database we have conducted a quantitative research by calculating key statistics for the strategies. We have also plotted performance diagrams were the strategies are compared with S&P 500. To be able to answer our research questions we constructed a table containing a summary of the risk and return for the strategies in bullish and bearish market times.

Results:

Our research showed that there were two strategies that were capable of delivering an absolute return for the entire period. However, when looking deeper into the yearly returns we found that there were another eight strategies that presented a negative return for just one out of the total eleven years. To conclude the research we have placed the strategies in order of precedence that works as a guideline for investing in the Swedish market in bull and bear markets.