6 Hedge Fund Strategies to Put in Your Back Pocket

Value investing

Value investing is one of the first strategies adopted by hedge funds, as it was brought to the mainstream by the famous Benjamin Graham and Jerry Newman, the former being the mentor to Warren Buffett.

Any value investing strategy involves the purchasing of undervalued securities. A derivation of this strategy is the long/short strategy, which involves short selling stocks that are considered overvalued by a manager, and purchasing undervalued stocks.

Different value investors–like Irving Kahn (pictured left) or Joel Greenblatt–have different ratios that they prefer to indicate if a company is undervalued, but metrics typically range from the P/E ratio, to the PEG ratio, to the P/B ratio.

The P/E measures how investors are valuing a stock based on its earnings, while the P/B factors how price is related to book value. Both ratios have trailing or forward iterations, the latter of which is used by some, but not all, investors instead of backward-looking metrics.

The PEG ratio, on the other hand, factors expected earnings growth into the equation, and attempts to normalize a stock’s valuation based on the rate at which a company’s bottom line is growing. Ratios like the PEB and even PEC (C = cash flow per share) are more exotic, but have the same basic meaning.