Investments, tenth edition

  Investment Strategies   

Mutual funds lay out their general investment approach (e.g., 

large, value stock orientation versus small-cap growth orientation) in their prospectus. They 

face pressure to avoid  style drift  (departures from their stated investment orientation), espe-

cially given the importance of retirement funds such as 401(k) plans to the industry, and the 

demand of such plans for predictable strategies. Most mutual funds promise to limit their 

use of short-selling and leverage, and their use of derivatives is highly restricted. In recent 

years, some so-called 130/30 mutual funds  

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   have opened, primarily for institutional clients, 

with prospectuses that explicitly allow for more active short-selling and derivatives posi-

tions, but even these have less flexibility than hedge funds. In contrast, hedge funds may 

effectively partake in any investment strategy and may act opportunistically as conditions 

evolve. For this reason, viewing hedge funds as anything remotely like a uniform asset class 

would be a mistake. Hedge funds by design are empowered to invest in a wide range of 

investments, with various funds focusing on derivatives, distressed firms, currency specula-

tion, convertible bonds, emerging markets, merger arbitrage, and so on. Other funds may 

jump from one asset class to another as perceived investment opportunities shift.