Hedge funds can be broadly classified into three categories:
1) Relative Value
2) Event-Driven
3) Directional
In relative value hedge funds, we don't actually care whether the market goes up or down, because its not going to affect us. Why? Because we're long one security, and short another.

The advantage of this strategy is its ability to perform well in both bull and bear markets. And this strategy is not limited to stocks; it's just what I used in the illustration above. You can use this strategy on sectors, countries, indexes, and even convertible securities (buy a company's convertible debt, short its stock...you get the interest payments for the debt you hold, but aren't subject to the fluctuations in the stock price!).
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