This chart illustrates a general classification of risk in relation to hedge fund styles.
When classifying a hedge fund, an important measure to consider is the degree of exposure to the broad movements of the market. This will have a direct influence on anticipated returns. Generally, hedge funds are set up with specific parameters so investors can forcast a risk/return profile. As illustrated by the chart, the more "directional" a fund, the more volatile, and a higher potential return.
More Risk: Funds in this class are very aggressive and may be able to profit in many types of market environments. They are opportunistic in nature, very often Global/Macro players.(See Strategies/definitions)
Moderate Risk: Traditional Long/short strategy with portion of portfolio hedged. This means the remaining portion is not.
Risk Averse: These funds emphasize consistent, but moderate returns. They avoid risk and seek low volatility. Strategies include:
Long/short (fully hedged) Special event: risk arbitrage, distressed securities Equity/fixed income arbitrage