What Is A Hedge Fund?

What Is A Hedge Fund?

In India, hedge funds are still very uncommon to be discussed. Unlike mutual funds and other types of investment, you and I can not do it because the minimum investment is quite huge here. According to the resources, these funds are the riskiest and ideal for the rich clients only. However, if you’re at the stage to start investing in these funds you need to learn more about it. This entire blog aims to demystify hedge funds by sharing basic information like What is this fund? Who can invest here? Some features of hedge funds, advantages, and considerations of hedge funds, and last but not least a simple comparison among hedge funds & mutual funds. So we hope it will help you to make valuable decisions regarding investments.

Understand Hedge Fund: Meaning 

Just like any other fund, hedge funds also come under this major category. But there are some basic differences. Hedge funds do not require to be registered under SEBI however they still come under SEBI’s purview, as they were introduced by SEBI in 2012 as Category III investment funds under AIFs (Alternative Investment Fund). A lot of different kinds of strategies are implemented to handle or manage these funds.

Who Can Invest In Hedge Funds?  

As we already said, hedge funds are expensive. In fact, the minimum investment is one crore in Indian currency. So unless you’re having a valuable net worth you won’t get the ticket to enter. Aside from this, the investors need to be aggressive, and they must have the potential to tolerate high levels of risk. So before you initiate your planning to start investing in hedge funds ask yourself whether you qualify both the criteria or not. There are a lot of ways to start investing here, but consider asking your financial advisor first before investing.

Some Features Of Hedge Funds

To make the decision whether you should start investing in hedge funds or not you should understand and get aware of the features first. 

  • Hedge Funds Are For Well-heeled Investors 

As these funds are basically high net-worth individuals. For example, banks, pension funds, insurance companies,accredited investors and many others with good earning potentials can only invest in these funds. In most cases, the minimum invested amount is 1 crore or more.

  • High Fees 

The management fee for these funds can be below 2% and sometimes below 1% as well and profit sharing is mostly between 10% to 15%. The structure of their work consists of both management fees and expense ratios. On a global basis, the percentage is 20% profit and 2% fixed fees.

  • Diversifying Investment Option

Hedge funds maintain a diversified portfolio for their investors because they invest in derivatives, real estate, equities, bonds, currencies, and also in stocks. Along with this they cover up all the asset classes and. If you can easily tolerate the risk then go for it.

  • Regulations For Hedge Fund

We have already mentioned earlier, that there is no requirement for a hedge fund to be registered under the rules and regulations of SEBI. And unlike the mutual fund, they may or may not disclose their NAV (Net Asset Value) on a regular basis.

  • High Risky In Nature

Just like any other type of fund you have to face losses here as well. But the percentage of loss can be huge. The amount of leverage used by these funds can make you face significant loss as well.

Three Advantages & Consideration Of Hedge Funds

Before investing such a big amount every investor should have a deep idea regarding this category of fund. 

The basic advantages:

  • The fund managers in hedge funds are considered as one of the most active managers. They constantly keep track of the market and manage your portfolio accordingly. 
  • Unlike the traditional investment style, they follow alternative investment strategies and therefore the investors can gain a lot.
  • As the fund managers have the option to invest in a wide range of assets like bonds, real estate, and stocks, hedge funds have the potential for high demand.

Things to consider:

  • The high fees nature of hedge funds can be the reason for some people not to invest here. Not only the 2% management fees but also the 20% of performance fees is a big thing for every investor.
  • The policies are less transparent here. The managers are not bound to share where they are investing and which strategy they are applying, even the NAV is also less frequently disclosed or as narrated in the policy. 
  • As hedge funds invest in leverage and derivatives, investors can also witness huge losses, so before making the investment you should have the preparation. 

Difference Between Hedge Fund & Mutual Fund

  •         The minimum investment required in a hedge fund is 1 crore but mutual funds can be stated with 100 rupees only.
  •         Hedge funds are not registered under SEBI but mutual funds are fully registered. 
  •         Short selling is permitted for hedge funds but not permitted for mutual funds.
  •         Risk factors are extremely high for the hedge fund investors but risk is comparatively lower for the mutual fund investors. 
  •         The minimum corpus of hedge funds is 20 crore but unidentified for the mutual funds.
  •         The investor category for this fund is banks, HNIs, etc. but for MF it can be any domestic investor.

To Wrap Up

Hedge fund provides a diversifying opportunity to the investors, so whether you are capable enough to handle the risks, is a decision made entirely by you. The financial advisors or fund managers can give you suggestions only, but the decision needs to be made by you. If you had no idea regarding hedge funds, then we hope the discussion was beneficial for you. Understanding financial investment is not an easy thing unless you have some real experience. So just into the ocean of investment as per the guidance given by your financial advisor, you’ll certainly get all your answers.

Please share your thoughts on this post by leaving a reply in the comments section. Contact us via Phone, WhatsApp, or Email to learn more about mutual funds, or visit our website. Alternatively, you can download the Prodigy Pro app to start investing today!

Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.

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