Hedge Fund is a private investment company and group of funds that employ a variety of complex ownership strategies and invest or trade complex products, including listed and unlisted derivatives.
Put simply, a hedge fund is a pool of money that takes long and short positions, buys and sells stocks, initiates arbitrage, and trades bonds, currencies, convertibles, commodities and derivatives to generate low risk returns. As the name suggests, the fund tries to protect itself against market volatility risks for investors’ capital through alternative investment approaches.
Investors in hedge funds usually include high net worth individuals and families, foundations and pension funds, insurance companies and banks. These funds act as private investment companies or offshore investment companies. They do not need to be registered with the securities regulator and are not subject to any disclosure requirements, including regular NAV disclosure.
There are many strategies a hedge fund can use to generate returns. One such strategy is the macro-macro strategy, in which the fund takes long and short positions in major financial markets based on cyclical sentiment. Then there are funds that operate according to market-neutral strategies. Here, the manager’s goal is to minimize market risk by investing in long / short equity funds, convertibles, arbitrage funds and bond products.
Another type are event funds that invest in stocks to take advantage of price movements due to corporate events. Merger arbitrage funds and distressed asset funds fall into this category.
How do hedge funds work?
Hedge fund returns are more indicative of management skills than market conditions. Asset managers do their best here to reduce / reduce market exposure and achieve good returns despite market movements. They work in small sectors of the market to reduce risk through greater diversification.
More about hedge funds
As of June 30, 2014, there were 158 alternative investment funds (private equity investment vehicles, real estate and hedge funds). Some examples of hedge funds are names like Munoth Hedge Fund, Forefront Alternative Investment Trust, Quant First Alternative Investment Trust, and IIFL Opportunities Fund. There are others like Singlar India Opportunities Trust, Motilal Oswal Offshore Hedge Fund, and India Zen Fund.
The minimum banknote size for investors investing in these hedge funds is 1 billion rupees. According to the Eurekahedge India Hedge Fund Index, which tracks hedge funds in India, the category achieved a return of 5.07% in 2015 compared to 38.84% in 2014.
How hedge funds differ from mutual funds?
Hedge funds are still in their infancy and not as well known as other mutual funds. Although they also group the investments of several investors, they use very complex strategies to hedge risks and generate high returns. In this article, we take a look at hedge fund and track their popularity in India.
Who should invest in hedge funds?
Hedge funds are privately managed mutual funds by experts. Because of this, they are usually a bit more expensive. Therefore, they are affordable and only accessible to financially strong people. In addition to being overfunded, you need to be an aggressive risk seeker as the manager buys and sells assets at breakneck speed to keep up with market movements.
The greater the structural complexity, the greater the risks. Therefore, the expense ratio (fund management effort) is much higher for hedge funds than for regular mutual funds. This can add up to 15-20% of your returns. We therefore recommend that new investors only use these funds after they have gained extensive experience in this area.
Even then, everything depends on the fund manager. If you don’t fully trust your fund manager, investing in hedge fund can cause you sleepless nights.