• macro funds, which take large directional (unhedged) positions in national markets based on top-down analysis of macroeconomic and financial conditions, including the current account, the inflation rate, and the real exchange rate;
• global funds, which also take positions worldwide, but employ bottom-up analysis, picking stocks on the basis of individual companies' prospects; and
• relative value funds, which take bets on the relative prices of closely related securities (treasury bills and bonds, for example).

Within these categories, there is further diversity. Although most macro hedge funds take positions mainly in mature markets, some also take positions in emerging markets. A number of the largest macro funds do both and spread their holdings across equities, bonds, and currencies (taking both short and long positions), and in addition hold commodities and other less liquid assets such as real estate. But the majority of macro funds hold a more limited range of assets, typically allocating only a fraction of their portfolios to emerging markets, where risks of concentrated stakes and costs of establishing and liquidating large positions can be high. Most relative value funds similarly limit their holdings to the mature markets, because their expertise is limited to those markets.

Hedge funds and other investors engage in many of the same practices. Individuals and some institutions buy stocks on margin. Commercial banks use leverage in the sense that a fractional-reserve banking system is a group of leveraged financial institutions whose total assets and liabilities are several times their capital. The proprietary trading desks of investment banks take positions, buy and sell derivatives, and alter their portfolios in the same manner as hedge funds. For all these reasons, any line between hedge funds and other institutional investors is increasingly arbitrary.