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Hedge Funds

A hedge fund works by accumulating capital from experienced or institutional investors and then investing in a portfolio that comprises of a wide array of assets. It is generally managed by a professional investment management firm and is often a limited partnership, limited liability company. These funds are sold only to accredited investors and are not made available to the general public.

Features & Benefits of Hedge Funds

Taxation

Income earned from hedge funds is taxable at the investment fund level. This is because the Category III Alternative Investment Funds (AIF) has not yet been granted a go-ahead on taxes. As a result, unitholders of hedge funds are yet to become eligible for tax obligations. This places hedge funds at a back foot from other mutual funds as they would be taxed at the investment fund level.

Risks

Hedge funds are generally exposed to capital market risks. Besides, they are also accompanied by comparatively longer lock-in periods. Hence, the returns on these investments often are not as high as that of other investments.

Portfolio of investments

Hedge fund offers a wide range of investment options like currencies, stocks, real estate, derivatives, equities and bonds. These funds invest in every asset class, though they are restricted by the mandate.

Fee Structure

Expense ratio as well as management fee, both are applicable on hedge funds. The management fee for hedge funds in India is below 2% or 1%, while the profit sharing usually ranges between 10% and 15%.

Minimum investment

The minimum investment for hedge funds starts from Rs. 1 crore. Hence, such investments are suited only for accredited and experienced investors with a high net worth usually from sectors like insurance, banking, pension funds and endowments.

How Hedge Funds Work?

Investments in hedge funds require the skills and expertise of an experienced investment consultant. It needs keeping a close watch on the existing capital market conditions and foreseeing the future, which only investment professionals and seasoned investors will be capable of. Asset managers keep the portfolio safe from market exposure and avert risks, aiming at generating high returns. They generally target small markets to reduce risks through increased diversification.

Let’s take a look at some of the popular investment strategies that asset managers follow for hedge fund investments.

Sell short

The Asset Managers sell shares, expecting an impending fall in prices, so that the shares can be bought back at a cheaper price in the near future.

Use arbitrage

This investment strategy is put to good use by asset managers when securities have contradictory pricing. Invest in discounted securities - Some securities are available at a surprisingly low price when their companies are running at a loss. Asset managers may decide to purchase some of these securities after carefully considering their pros and cons.

Invest in an event

Business events like mergers and acquisitions may offer promising prospects for the manager’s investment strategies.

Who Should Invest in Hedge Funds?

  • Hedge funds belong to the mutual fund category and are managed privately by skilled asset managers.
  • An investment option only for seasoned investors with a high net worth since hedge fund investments start at Rs. 1 crore. It is advisable that novice investors stay away from investing in such funds, unless you have complete faith in your fund manager.
  • Suitable only for investors with a high risk appetite.
  • Hedge funds are exposed to capital market risks. Also, it involves purchasing and selling these funds within a short span of time to be consistently aligned with the capital market and generally ranges between 15% and 20% of the investor’s returns.

FAQs on Hedge Funds

Are hedge fund investors rich?

The returns on hedge fund investments that the investor will avail are determined by the capital market conditions and the risk exposure. Investors who are ready to take high risks can get higher returns.

Are hedge funds legal?

Yes, Hedge funds have been classified under the Category 3 of AIF (Alternate Investment Funds). Some specific investors, who meet certain SEBI regulations, are allowed to invest in these funds.

Can hedge funds make you rich?

Hedge funds are exposed to capital market risks. When invested at the right time, they can generate high returns.

Can I invest in a hedge fund?

Novice investors should stay away from such investments. Hedge funds are a good investment option for accredited investors with a high net worth since these funds start at a minimum of Rs. 1 crore. Also, investors need to have a high risk appetite as these funds are exposed to high capital market risks.

Do hedge funds beat the market?

Hedge funds can beat the market when the investment is done and when the market risks are minimal.

Do hedge funds invest in real estate?

Yes, there are some hedge funds that invest in real estate also.

Do you have to be an accredited investor to invest in a hedge fund?

Yes, it is recommended that only accredited investors invest in hedge funds.

How do hedge funds raise money?

The limited partners involved in hedge fund investments contribute capital while general partners are responsible for managing the funds. Hedge funds usually invest borrowed money to generate good returns.

How can I become a hedge fund manager?

For becoming a hedge fund manager one must hold relevant degrees, qualifications, technical skills and license from appropriate authorities. One must hold a master’s or bachelor’s degree in Accounting and Finance along with technical ability to analyse market trends and investment data. Candidate must also have excellent communication skills.

How do you make money in a hedge fund?

The limited partners involved in hedge fund investments contribute capital, usually borrowed capital, as such investments start at a minimum of Rs. 1 crore. On the other hand, general partners are responsible for managing the funds. Hedge funds usually invest borrowed money to generate good returns. Hedge funds attract performance fee as well as expense ratio.

How does hedge accounting work?

Investments in hedge funds require the skills and expertise of an experienced investment consultant. It needs keeping a close watch on the existing capital market conditions and foreseeing the future, which only investment professionals and seasoned investors will be capable of. Asset managers keep the portfolio safe from market exposure and avert risks, aiming at generating high returns. They generally target small markets to reduce risks through increased diversification.

How much do I need to invest in a hedge fund?

Hedge fund investments start at a minimum of Rs. 1 crore.

How much money does a hedge fund make?

The returns on hedge fund investments depend on various parameters like invested capital, market risks, expense ratio, management fee, etc.

Is a hedge fund a good investment?

It is not a preferable investment option for first-time investors. They are recommended only for accredited investors with a high net worth as the minimum investment amount start at Rs. 1 crore. Also, it is suitable only for investors with a high risk appetite as these funds are exposed to high market risks.

What exactly does a hedge fund do?

Investments in hedge funds require the skills and expertise of an experienced investment consultant. It needs keeping a close watch on the existing capital market conditions and foreseeing the future, which only investment professionals and seasoned investors will be capable of. Asset managers keep the portfolio safe from market exposure and avert risks, aiming at generating high returns. They generally target small markets to reduce risks through increased diversification.

What is a hedge fund in simple terms?

To hedge means to safeguard, and in the context of investing, it means to safeguard against risks. A hedge fund collects funds from accredited investors like High Net Worth individuals (HNIs), banks, insurance companies, pension funds and endowments. As a result, such funds often act like private investment partnerships or overseas investment corporations. Hedge funds, unlike other mutual fund categories, do not need to be registered with SEBI nor do they have to periodically disclose their NAV.

A hedge fund invests in a varied range of asset classes like currencies, equities, bonds and convertible securities. They hold long and short positions as well as listed and unlisted derivatives. The funds are managed by experienced asset managers by exposing the units in the portfolio to market risks while averting risks, with the objective of generating good returns.

What is an example of a hedge fund?

  • Avendus Capital Alternate Strategies
  • Softbank
  • Tiger Global
  • KKR
  • DST Global

What is the minimum to invest in a hedge fund?

The minimum investment amount for hedge fund is Rs. 1 crore.

Who can invest in a hedge fund?

  • Hedge funds belong to the mutual fund category and are managed privately by skilled asset managers.
  • An investment option only for seasoned investors with a high net worth since hedge fund investments starts at Rs. 1 crore. It is advisable that novice investors stay away from investing in such funds, unless you have complete faith in your fund manager.
  • Suitable only for investors with a high risk appetite.
  • Hedge funds are exposed to capital market risks. Also, it involves purchasing and selling these funds within a short span of time to be consistently aligned with the capital market and generally ranges between 15% and 20% of the investor’s returns.

Why do hedge funds make so much money?

Hedge funds are exposed to the capital market to generate high returns.

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