Hedge Fund Investment Methodologies

Market Sizing -- TAM (Total Addressable Market), SAM (Serviceable Available Market), SOM (Serviceable Obtainable Market). Quantify the revenue ceiling before modeling growth.
Customer Analysis -- Cohort retention, LTV/CAC ratios, switching costs, willingness to pay. Understand the demand curve at a unit level.
Competitive Dynamics -- Porter's Five Forces: threat of new entrants, supplier/buyer power, substitution risk, rivalry intensity. Map the profit pool across the value chain.
Industry Lifecycle -- Nascent, growth, maturity, or decline? Capital allocation strategies differ radically at each stage.

Management Quality -- Capital allocation track record, insider ownership, incentive alignment, operational discipline. Study proxy statements and compensation structures.
Moat Analysis -- Five sources: brand power, network effects, switching costs, intellectual property, and cost advantage through scale. Quantify the moat's durability and depth.
Unit Economics -- Gross margin decomposition, contribution margin, incremental ROI on growth capex. Does the business earn above its cost of capital per unit sold?

DCF Valuation -- Project free cash flows 5-10 years forward. Calculate WACC (weighted average cost of capital), determine terminal value via Gordon Growth or exit multiple. Run sensitivity tables across growth rate and discount rate assumptions.
Comparable Company Analysis -- Benchmark against peers using EV/EBITDA, P/E, P/B, and EV/Revenue multiples. Adjust for growth differential, margin profile, and capital structure.
Precedent Transactions -- Analyze historical M&A in the sector for control premiums and strategic value.

What does consensus miss? Where is the market structurally wrong? The edge lies in identifying information asymmetries -- earnings quality adjustments, hidden liabilities, unrecognized assets, or misunderstood business model transitions that the sell-side has not yet priced.

Single candle -- Doji (indecision), Hammer (bullish reversal at support), Shooting Star (bearish reversal at resistance), Spinning Top (equilibrium between bulls and bears).
Multi-candle -- Bullish/Bearish Engulfing (momentum reversal), Morning Star / Evening Star (three-candle reversal), Three White Soldiers / Three Black Crows (trend continuation signals).

Reversal -- Head and Shoulders (distribution top), Inverse H&S (accumulation bottom), Double Top / Double Bottom (re-test failure/success at key levels).
Continuation -- Ascending/Descending/Symmetrical Triangles, Bull/Bear Flags, Pennants. Measure the flagpole height for projected move targets.
Complex -- Cup and Handle (rounded base with volatility contraction), Wedges (rising wedge bearish, falling wedge bullish).

Moving Averages -- SMA (simple), EMA (exponential, more weight on recent data), VWAP (volume-weighted average price, institutional benchmark). Key levels: 20/50/200-day MAs. Golden cross and death cross signals.
Oscillators -- RSI (relative strength index, overbought > 70, oversold < 30), MACD (signal line crossovers, histogram divergence), Stochastic (fast/slow %K and %D).
Volatility -- Bollinger Bands (2 standard deviation envelope around 20-SMA), ATR (average true range for stop-loss calibration).
Volume -- Volume Profile (price levels with highest traded volume), OBV (on-balance volume for accumulation/distribution).

Fibonacci Retracements -- 23.6%, 38.2%, 50%, 61.8%, 78.6% levels derived from the Fibonacci sequence. Used to identify pullback targets within a trend.
Pivot Points -- Calculated from prior session high/low/close. Daily, weekly, and monthly pivots serve as intraday reference levels.
Order Flow -- Level 2 data, time and sales tape reading, bid/ask imbalances, iceberg order detection. Understand where institutional players are positioned.

Confluence across daily, weekly, and monthly charts increases signal reliability. Trade in the direction of the higher timeframe trend, enter on lower timeframe pullbacks. Multi-timeframe confirmation reduces false signals and improves risk/reward ratios.

Value (HML) -- High book-to-market minus low. Stocks trading below intrinsic value based on accounting metrics (P/B, P/E, EV/EBITDA). Fama-French value premium has compressed in recent decades.
Size (SMB) -- Small minus big. Small-cap premium driven by lower liquidity, less analyst coverage, and higher idiosyncratic risk.
Momentum (UMD) -- Up minus down. Buy recent winners, short recent losers over 2-12 month horizons. Cross-sectional and time-series variants. Subject to sharp reversals (momentum crashes).
Quality (QMJ) -- Quality minus junk. High profitability, low earnings variability, conservative accruals, strong balance sheets. Defensive factor that outperforms in drawdowns.
Low Volatility -- Low-beta stocks outperform high-beta on a risk-adjusted basis. Driven by leverage constraints and lottery preferences among retail investors.

Alternative Data -- Satellite imagery (parking lot counts, crop yields), NLP sentiment (news, social media, earnings call tone), web scraping (job postings, pricing, product reviews), credit card transaction data, app download metrics.
ML-Derived Features -- Gradient boosting (XGBoost, LightGBM) for nonlinear factor interactions, deep learning for sequence modeling (LSTMs, Transformers on order book data), reinforcement learning for execution optimization.

Pairs Trading -- Identify cointegrated pairs, trade the spread when it deviates from equilibrium. Engle-Granger test, Johansen procedure for cointegration validation.
Mean Reversion -- Short-term price dislocations revert to fair value. Requires high-frequency data and rapid execution. Half-life estimation via Ornstein-Uhlenbeck process.
Market Microstructure -- Bid-ask bounce, adverse selection, Kyle's lambda, order book imbalance signals. Alpha decays rapidly in this domain.

Mean-Variance Optimization -- Markowitz framework with covariance estimation challenges. Shrinkage estimators (Ledoit-Wolf) and robust optimization to handle estimation error.
Black-Litterman -- Blend market-implied equilibrium returns with subjective views. Produces more intuitive portfolio weights than raw MVO.
Risk Budgeting -- Risk parity, equal risk contribution. Allocate based on marginal risk contribution rather than capital weight.
Kelly Criterion -- Optimal bet sizing for long-run geometric growth. Fractional Kelly (typically 1/4 to 1/2 Kelly) in practice to reduce drawdown variance.

Walk-Forward Analysis -- Rolling in-sample calibration followed by out-of-sample validation. Prevents overfitting and provides realistic performance estimates.
Transaction Cost Modeling -- Slippage, market impact (Almgren-Chriss), commission, borrow cost. Strategy viability depends heavily on realistic cost assumptions.
Bias Awareness -- Survivorship bias, look-ahead bias, selection bias, overfitting to noise. Publication bias in factor research.

Deal Spread Analysis -- The spread between current market price and offered price reflects completion risk. Wider spreads indicate higher perceived risk of deal failure. Annualized return = spread / days-to-close x 365.
Regulatory Risk -- Antitrust review (DOJ, FTC, EU Commission, SAMR), CFIUS national security review, industry-specific regulators. Model probability of regulatory block vs. conditional approval.
Deal Break Probability -- Material adverse change clauses, financing conditions, shareholder vote requirements, competing bids. Historical completion rates by deal type and regulatory environment.

Credit Analysis -- Analyze capital structure waterfall: secured debt, unsecured, subordinated, mezzanine, equity. Recovery rate modeling across scenarios (liquidation vs. going concern).
DIP Financing -- Debtor-in-possession financing provides super-priority status. Often the highest risk-adjusted return opportunity in restructuring situations.
Plan of Reorganization -- Negotiate the terms under which the company exits bankruptcy. Fulcrum security identification -- the tranche where enterprise value "breaks" between recovery and impairment.

Spin-offs -- Corporate carve-outs create forced selling (index fund rebalancing, mandate mismatches). Historically outperform the parent and the market in the 12-24 months post-separation.
Rights Offerings -- Dilutive capital raises at a discount. Non-participating shareholders face value destruction. Opportunity in purchasing discounted rights or shares.
Share Buybacks -- Signal management confidence in undervaluation. Accelerated share repurchase (ASR) programs provide near-term price support.
Index Reconstitution -- Additions to major indices (S&P 500, Russell 2000) trigger passive fund buying. Deletions trigger forced selling. Predictable supply/demand imbalance.

13D Filings -- Required when accumulating > 5% of outstanding shares with intent to influence. The filing itself is often a catalyst as market reprices with activist premium.
Value Unlocking -- Board representation, strategic review (asset sales, spin-offs), capital return (buybacks, special dividends), operational improvements, management change.

Systematic tracking of upcoming catalysts: earnings dates, FDA approval decision dates (PDUFA), regulatory rulings, election outcomes, central bank meetings, index rebalance dates. Each catalyst represents a binary or multi-outcome event with asymmetric payoff potential.

Growth -- GDP (real vs. nominal), industrial production, PMI (manufacturing and services), leading economic indicators. Nowcasting models for real-time GDP estimation.
Inflation -- CPI, PCE (Fed's preferred measure), PPI, breakeven inflation rates. Core vs. headline decomposition. Wage growth and unit labor cost dynamics.
Labor Market -- Non-farm payrolls, unemployment rate, JOLTS, participation rate, U6 underemployment. Labor market tightness drives wage inflation expectations.
Yield Curves -- 2s10s spread as recession indicator, term premium decomposition, real rates (TIPS-implied). Inverted curve historically precedes recession by 12-18 months.

Monetary Policy -- Fed (FOMC), ECB, BOJ, PBOC. Track forward guidance, dot plots, minutes language changes, balance sheet operations (QE/QT). Taylor Rule deviations signal policy positioning.
Fiscal Policy -- Government spending, tax policy, deficit projections. Fiscal multiplier estimates vary by output gap. Debt-to-GDP sustainability analysis.
Trade Policy -- Tariffs, trade agreements, sanctions, export controls. Model second-order effects on supply chains and currency markets.

Carry Trade -- Borrow in low-yielding currencies, invest in high-yielding. Profitable in low-volatility environments but vulnerable to sudden risk-off unwinds. Sharpe ratio eroded by crash risk.
Purchasing Power Parity -- Long-run valuation anchor. Real effective exchange rate (REER) mean reversion over multi-year horizons. Short-term deviations can persist for years.
Balance of Payments -- Current account deficits/surpluses drive long-term currency trends. Capital account flows (FDI, portfolio flows) provide medium-term signals.

Duration Management -- Adjust portfolio duration based on rate cycle expectations. Convexity positioning for non-linear payoffs in large rate moves.
Curve Trading -- Steepeners (long short-end, short long-end) vs. flatteners. Butterfly trades on intermediate maturities. Roll-down strategies in positive carry environments.
Inflation Breakevens -- TIPS vs. nominal Treasury spread as market-implied inflation. Trade dislocations between breakevens and survey-based expectations.
Sovereign Credit -- CDS spreads, debt sustainability metrics, political risk assessment. Emerging market local currency bonds for carry and FX exposure.

Supply/Demand -- OPEC decisions, shale production economics, inventory drawdown rates. Agricultural commodities driven by weather, planting acreage, and trade flows.
Seasonal Patterns -- Energy demand cycles (heating/cooling), harvest calendars, refinery maintenance windows. Mean reversion in roll yield driven by contango/backwardation structure.
Geopolitical Risk -- Supply disruption probabilities (Strait of Hormuz, pipeline conflicts), sanction regimes, strategic petroleum reserve releases.