Ask average investors what a hedge fund is, and I dare say you’ll get a variety of answers. The most common may be: “I don’t know.”

And that’s understandable. First, hedge funds are notoriously private and secretive, reserved for only the wealthiest investors. And second, there are various kinds of hedge funds that use various strategies. So let’s spend a few moments talking the most common types of hedge funds, and then I’ll tell you which approach I’ve found to be the best.

Here are five kinds of hedge funds you’re likely to see mentioned if you research the industry:

1. Global macro: As you would expect, these hedge funds monitor and anticipate global market events and invest accordingly in stocks, bonds, commodities, currencies, etc. Within this framework, they can invest for the long term or short term, use leverage, go long and short, and more. The world is a big place, so there are opportunities to diversify to manage risk.

2. Market neutral: This is a classic hedging strategy, as fund managers don’t make a big bet on the market’s direction. Instead, they take both long and short positions regardless of the market environment. This approach can outperform in down markets but is vulnerable to underperformance in up market.

3. Directional: Unlike the market-neutral approach, directional hedge funds try to take advantage of market movement and trends. This strategy carries more risk than market neutral, but risk is still considered, and hedging remains a part of the overall approach. These funds can still go long and short, but are not locked in to a neutral position. As you would expect, directional funds do best when there are strong trends playing out in the overall market and/or sectors and subsectors.

4. Event driven: This is the “catalyst” approach. You look for specific events to drive a particular investment higher or lower and invest accordingly. Events can be a variety of things, such as acquisitions, spin-offs, new product announcements, drug approvals, bankruptcies, reorganizations, management changes, regulatory developments, earnings reports, and many others.

5. Relative value/arbitrage: Arbitrage, as you may know, is profiting from price discrepancies. This can sometimes be like good old-fashioned value investing: Your analysis shows a stock is worth $50 when it’s trading at $30, giving you an opportunity to take advantage of the difference. There are many ways to exploit price differentials, ranging from the relatively simple to the very complicated. This approach is often market-neutral, focusing instead on specific “before and after” valuation opportunities.

As you would expect, there are many types of hedge funds as well as variations within each kind. So if you were to invest like a hedge fund, which approach is best? I must confess that’s a bit of a trick question, because the answer is all of them.

The term for that is “multi-strategy.” I’ve never been a fan of being locked into one approach. By definition, there are times when that approach will be more successful than at other times. The market is always changing, and staying with the same strategy is restricting your options. I’ve had much more success using multiple strategies to go after the best opportunities as well as the best hedges to both increase returns and manage risk. That’s the way I managed my hedge fund, and that’s the same approach I’ll be taking with the new Kramer Absolute Capital Return portfolio.