Hedge funds are extremely popular in Indian Stock Markets. They are also very popular among startups who get a lot of funding from Hedge Fund Managers.
So what is a Hedge fund? Why are they in the news so soften? Hedge Fund is a type of an investment fund which is used to invest in a wide variety of investment strategies (ranging from high to very high risk) that are used to cut risks of the investors from the market movements.
Hedge funds are not as widely known as mutual funds. Hedge funds are not as common as Mutual Funds as people cannot invest in them. These funds too collect money from investors and they use highly complex strategies to hedge risks and delivers high returns. The amount collected from investors is usually very very high (in crores of Rupees/ millions of Dollars).
Breaking it down :
The literal meaning of a hedge is to avoid risks. A hedge fund functions by using the funds collected from recognized investors such as banks, insurance firms, high net-worth individuals, family offices and pension funds. This is the main reason why these funds function as overseas investment corporations or private investments. They don’t need to be registered with the SEBI and do not need to disclose their NAVs periodically like other mutual funds. It consists of asset classes like derivatives, bonds, equities, currencies, and convertible securities. They are also called alternative investments.
Who should invest in Hedge Funds :
Basically, hedge funds are the type of mutual funds which are privately managed by experts. This is why there are comparatively expensive than the other mutual funds. They are only affordable for the financially well off. Greater the deposits, higher is the risks. So, the expense ratio (fee to the fund manager) is a lot more for hedge funds than regular mutual funds. It ranges from 15% to 20% of your final returns. Therefore, unless you have full faith in your fund manager, investing in hedge funds can cause heavy losses.
Features of Hedge Funds :
Hedge Funds are still young in India, as they got recognized only in 2012 after the SEBI allowed alternative investment funds (AIF) in India.
They provide the following features :
Only recognized or well-qualified investors can invest in hedge funds. They are mainly the high net worth individuals (HNIs), banks, insurance companies, endowments, and pension funds. The minimum ticket size for the investors to invest in these funds is Rs 1 crore.
- Investment Latitude
Hedge funds have a huge variety of asset class investments ranging from investments in currencies, derivatives, stocks, real estates, equities and bonds. The large number of investment products that they invest in makes Hedge Funds attractive. The large number of investments make the possibility of losses minuscule.
- Fee Structure
Hedge funds basically work on the concept of both the expense ratio and management fee. Globally, it is called the ‘Two and Twenty’, meaning there is a 2% fixed fee and 20% of the final profits. The hedge funds in India, the management fee ranges between 2% to 1%. The profit sharing percentage fluctuates between 10% to 15%.
Hedge fund investment strategies can expose a fund to huge losses in the market. The lock in period is generally long. The leverage used by hedge funds can turn large investments into a huge loss. As a fund, Hedge Funds usually seek out high risk investments, which usually yields very high profits.
The Category III of AIF (hedge funds) is still not given a pass-through status on tax. This implies that income from these funds is not taxable at the investment fund level. The tax obligation will not pass through to the unit-holders. This is a major disadvantage for this industry as they are not on a level playing ground with the other mutual funds.
It is not compulsory for a Hedge Funds to be registered with the securities markets regulator and have no reporting requirements including periodic disclosure of Net Asset Values (NAV).
As an investment option, Hedge Funds are considered to be one of the riskiest ways to multiply investor funds. However, most Hedge Funds have a track record of providing extremely high Returns on Investments. American and European Hedge Funds are known to multiply their funds by 10X – 20X, which is what makes them so attractive.
As the benefits for these fund advisers and investors are comparatively higher than other funds, Hedge Funds have historically been attractive investment opportunities.
BSE Institute Limited, a 100% subsidiary of BSE India, has been offering short term courses for the last few decades. It has successfully helped scores of students begin their careers and offered a great platform for professionals to rise to greater heights. To help one learn about hedge funds, BSE Institute’s BSEVarsity.com offers a short-term course on Introduction to Hedge Funds where one can learn and begin their journey in the field of hedge funds.