Hedging is not what hedge funds do!
Hedge funds are very complex to understand and interpret and people often confuse the term with hedging so first of all Hedging is not what hedge funds do. Hedge funds are a completely different concept and is also vaguely similar to mutual funds.
Hedge fund is in itself a fund comprising of both traditional and non-traditional assets in a fund, the quantity of non-traditional being higher than the former. They can be characterised as a fund meant for high net-worth individuals and deep pocket people who are willing to take risk for insane returns sometimes.
Hedge fund is basically a fund which is managed and conceived by big corporates having expertise and skills like Blackrock, Blackstone etc. The ticket size of this fund is usually in millions. Also the entry to the fund is also quite expensive as it requires a high amount of investment in a particular fund to avail the benefits of the fund. Hedge funds are very secretive in nature as one does not reveal where a particular fund is investing and is going to invest.
Even the investors who have put in their money in a particular fund do not have the access to the information where the money is flowing. Hedge fund managers are people with immense knowledge and exposure not only about their domestic markets but also about the global scenario and the global financial markets. These fund managers usually have good international exposure and contacts. Generally, a typical hedge fund does not invest in their domestic market, but they deal in global markets which is the next big thing and is about to boom.
Hedge funds invest in highly risky assets which have high return feature as well. They also deal in external currency bonds and future and options products. Hedge funds use arbitrage techniques, long and short positions and undervalued securities.
Hedge fund managers also use technical analysis and fundamental analysis and also various modern and contemporary techniques to understand what is going to be the trend in the market.
Hedge also do spread trading, algo trading to explore and get the maximum possible return for the fund. In India, Karvy Capital has launched the first Hedge Fund in the country. According to SEBI norms, if you want to start a Hedge Fund it will be categorized under Alternative Investment Fund category- III. The regulation was created to ensure greater transparency and visibility in the functioning of alternative funds and alternative investments.
In order to start a Hedge fund in India, you need to have a minimum corpus size of INR 200 million. Each investor needs to invest at least 10 million INR individually in order to participate in the Hedge Fund. Since the inception of Hedge Funds in India, they have cumulatively raised the amount of around INR 23 billion (or 2300 Crores)
Before investing in a hedge fund, one should read the prospectus of the fund very well and understand the terms and conditions of ‘in and out policy’ and the exit plan of the fund in detail. Also, before investing in the fund, one should understand the fee of the manager in the fund and also research a bit about the people who are running the show.
The challenge for the hedge fund manager is to eliminate risk. While gaining return on investments is not a simple task, which is why hedge fund managers get paid handsomely if they succeed.
Do check out the video below to learn more about hedge funds:
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