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rencies, or derivatives. He would increase and decrease net market exposure of his portfolio based on his estimate of the strength of the market.

If there were $1,000 in capital, he might use leverage and buy shares valued at $1,000 and sell shares short valued at $400. In this example, gross investment is $1,500 ($1,100 + $400) or 150 percent of capital. Net market exposure is $700 ($1,100 – $400), making this portfolio 70 percent net long.9

His success during the 1960s bull market encouraged others to start hedge funds as well. During the 1960s, the small group of hedge funds tended to be long and short, following the A. W. Jones model. In the 1970s, a number of hedge funds closed during the 1973–1974 bear market. It was not until late 1989 and the early 1990s that the hedge fund concept again grew in popularity. Hedge funds have evolved to include a number of strategies with a broad range of return/risk characteristics.

Today, most hedge funds do not follow the A. W. Jones model. Different strategies have evolved; there is no uniform type of hedge fund. Because they each have different return/risk objectives, their performance patterns differ as well. Some of the different style categories are as follows.

With event-driven funds, event is the key word. An event occurs that is a special situation or creates an opportunity to capitalize from price fluctuations. There are four subcategories.

1. Risk arbitrage occurs when a manager buys stock in a company being acquired and sells stock in its acquirer. One example would be buying Time Warner and selling America Online (AOL). The principal risk is deal risk (i.e., should the deal fail to materialize). Stark Investments and Och-Ziff are managers that focus on risk arbitrage.

2. Distressed funds focus on stocks that are in bankruptcy, reorganization, or corporate restructuring. Distressed makes up a large percentage of Elliott Associates' and Citadel's portfolios.

3. Regulation D refers to investments in micro-cap and small-cap public companies that are raising money in private capital markets.

4. High yield, often called junk bonds, refers to low-grade fixed-income securities of companies that have upside potential. David Tepper's Appaloosa Management's core activity is high yield.