Hedge fund is a pooled fund of mainly high net worth individuals, institutional investors like banks, insurance companies, mutual funds etc. Basic concept of Hedge funds is same as of mutual funds as these are also pooled funds of many investors with an aim of investing large sum of money with the help of competent and professional managers to maximize the gains on investments. But hedge funds are different from mutual funds in many ways.
ü Hedge funds are not regulated by the market regulator as SEBI in India.
ü Hedge funds are not required to disclose their NAV daily or weekly as in case of mutual funds.
ü Hedge funds are more aggressively managed by fund portfolio managers.
ü Hedge funds mainly pool funds of investors with high income appetite and high risk bearing capacity. So in hedge funds only HNIs and institutional investors pool their money.
ü Hedge funds charge high management fee and performance fee also which is not seen in case of traditional mutual funds.
As the term Hedge means to take steps for averting or minimizing the potential risk. In case of hedge funds the investment fund manager uses different trading strategies to earn and safeguard the investment. These hedging tricks and strategies are employed to reduce the risk. For example if a fund manager for sees a market rise or rise in a particular stock price and keeps long positions (buying). Then some short position may be made in futures and options (F & O) of same stock or index as per situation. It would help to minimize the loss in case the market or the stock price goes in opposite way.
However the hedging technique is to be employed with due care and a proper check is needed considering the market positions time to time otherwise it may lead to increased risk. Generally management of hedge funds invests funds in alternative instruments like derivatives (F & O), equity, currencies, bonds etc. Fund managers of Hedge funds need to be very attentive for monitoring the market situation and results of the strategy employed. They need to be aggressive about changing their strategy according to changes in market situation. If the strategic move goes successful the earnings are quiet high in terms of return on invested amount as in case of F & O deals of large amounts are done with 20 to 30 percent margin only. In case of successful transaction the gain is on full value not only on the margin invested. But the risk is also very high if the employed strategy does not work and takes a U Turn. So the fund managers in case of hedge funds need to be more aggressive, vigilant, knowledgeable and competent then in case of traditional mutual funds. Due to this fact the management expenses of hedge funds are much higher than traditional mutual funds. Accordingly the management fee charged by the hedge funds from its investors is very high. The structure of investment portfolio of hedge funds is generally very wide and highly diversified comprising of equity, currency, funds and their derivatives. So the management of hedge funds also charges 10 to 20% of profits along with management fee of 1 to 2%.
Hedge fund managers generally employ following strategies:-
1. Directional Strategy
2. Long and Short bias
3. Bottom up
4. Top down
5. Arbitrage
6. Opportunistic
List of Indian market based Hedge funds:-
1. Monsoon capital equity value fund
2. India Capital Fund
3. India Deep Value Fund
4. Absolute India fund
5. India Capital Pte. Ltd.
6. Atlantis India Opportunities Fund
7. Passport India Fund
According to various reports Hedge funds in India are giving better returns in comparison to other countries. Average annualized return on hedge funds during past 6 years is nearly 18%. In this article we have discussed various pros and cons of Hedge funds to give basic knowledge and understanding of a not so widely known instrument of investment. In our next article we will discuss about some more innovative modern day mutual funds.