Hedge Funds

Friday 28th June 2019
Author: Shreya Uppal

Highlights

Hedge funds are still at an initial phase and are not so popularly known as other mutual fund types. Though they too collect money from investors, they use highly complex strategies to â€˜hedgeâ€™ risks and deliver high returns.
Hedge funds investment strategy can expose funds to huge losses. Lock-in period generally for investment is relatively long. Leverage used by these funds can turn investments into a significant loss.

Hedge funds are still at an initial phase and are not so popularly known as other mutual fund types. Though they too collect money from investors, they use highly complex strategies to ‘hedge’ risks and deliver high returns.
What is a Hedge Fund?
A hedge fund is a pool of money that takes both short and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies, convertible securities, commodities, and derivative products to generate returns at reduced risk. As the name suggests, the fund tries to hedge risks to investor’s capital against market volatility by employing alternative investment approaches.

Features of Hedge Funds
Hedge fund industry in India is relatively young and it got a green flag in 2012 when the Securities and Exchange Board of India (SEBI) allowed Alternative Investments Funds (AIF). They have the following features:
1. High Net worth Investors
Only qualified or accredited investors can invest in hedge funds. They are mainly high net worth individuals (HNIs), banks, insurance companies, endowments, and pension funds. The minimum ticket size for investors putting money in these funds is Rs 1 crore.

2. Diverse Portfolio
Hedge funds have a wide portfolio of investments ranging from investments in currencies, derivatives, stocks, real estates, equities, and bonds. They essentially cover all the asset classes only limited by the mandate.

3. Higher Fees
These funds work on the concept of both expense ratio and management fee. As for hedge funds in India, the management fee can well below 2% to below 1%. And the profit sharing varies between 10% to 15% generally.

4. Higher Risks
Hedge funds investment strategy can expose funds to huge losses. Lock-in period generally for investment is relatively long. Leverage used by these funds can turn investments into a significant loss.

5. Regulations
It is not required that Hedge funds be registered with the securities markets regulator and have no reporting requirements including regular disclosure of Net Assets Value (NAV).

Difference between Hedge funds and Mutual Funds

Basis	Hedge Funds	Mutual Funds
1. Investment stance	Hedge funds generally have an aggressive stance on their investments and seek higher returns using speculative positions and trading in derivatives and options. They can take short positions (Short Sell) in the markets	Short selling doesn’t allow these funds to benefit in the falling markets.
2. Leverage	Hedge funds have a huge amount of leverage and thus higher risk.	Mutual funds are safer as they don’t have much leverage
3. Investors	Hedge funds are available only to High net worth investors.	Mutual funds are accessible to a large group of people. In fact, you can start a SIP with the amount as low as Rs. 500.