A Hedge fund is a pooled investment vehicle that invests in risky securities in pursuit of generating alpha for their clients. Generally, the HNIs invest in hedge funds.
Regulation of a hedge fund
Sebi regulates hedge funds with its AIF Regulations. It falls under Category 3 of AIF. Alternative investments are anything that doesn’t fall under the traditional investment options like equity or fixed-income assets. Generally, they are subject to regulatory guidelines that apply to investors of publicly traded securities.
The minimum amount for a fund to be entitled as a hedge fund is INR 20 crores, and for an investor to invest in it, the minimum amount is INR 1 crore.
Benefits of investing in a hedge fund: –
- The performance of the fund is not interrelated with the performance of a benchmark or index; hence it is independent
- One Gets manager’s expertise while investing money in a hedge fund
- Manager’s interest and dedication are more as most of the managers invest their own funds in the same. Therefore personal attention is involved
- A hedge fund aims to generate maximum returns while hedging against all kinds of risk
Drawbacks of investing in a hedge fund
- The fund manager’s fees are usually high
- Minimum amount to be invested is quite high which means high risk
- Usually, withdrawals are not accessible. Lockin period is high
- They are not suitable for retail investors since the investment requirement is quite high
Hedge funds are not commonly subscribed to by retail investors because they are not distributed through the regular channels but are privately sold (mostly to FIIs or/and HNIs).
Hedge funds bank on undervalued, overvalued securities, convertible bonds, news and information about mergers, and other factors to try and unlock returns for its investors.
Hedge fund managers hold both long and short positions on various securities depending on their role in the portfolio (say, buying undervalued stocks and selling overvalued ones). This also makes hedge funds high risk-high returns. The fund managers employ different strategies to optimize profits.