- Who should do hedge funds minimum investment?
- What are the important features and advantages of Hedge funds?
- How do hedge funds work?
- Now let us know about hedge fund vs private equity funds
- Are hedge funds bad?
- Do hedge funds beat the market?
- Are hedge funds regulated?
- Are hedge funds high risk?
- Are hedge funds legal?
Hedge funds is still in its initial phase and is not as same as other mutual funds. Even they also pool some investments from several investors, they make use of highly complicated plans to hedge risks and the give back some high returns.
Let’s know about hedge funds in details and track the rising popularity in our country.
The meaning of hedge is to safeguard, and in terms of investing it implies to give protection against all kinds of risks. A hedge fund make use of the funds that are collected from the attributed investors such as banks, high net worth individuals and insurance firms along with the endowments and the pension funds. Because of this reason, these funds often work as overseas investment corporations or as private investment partnerships.
They do not require registration with SEBI and also they do not require disclosing NAV occasionally like any other mutual funds.
The portfolio of the hedge fund to invest in includes some of the asset classes like derivatives, bonds, currencies, equities along with some of the convertible securities. Due to this they are considered as one of the alternative mode of investments. Taking into account hedge fund vs mutual fund, the former keeps an tendency to implement subsequent leverage. They keep on hold both long as well as short positions, even including those positions that are listed as well as unlisted derivatives.
Who should do hedge funds minimum investment?
Hedge funds are those mutual funds that are confidentially managed by the experts. Because of this reason it is bit costly to make hedge fund minimum investment. So, they are easily affordable as well as feasible only for the financially strong people. To make investments in hedge fund you will not only need some surplus funds but also you have to be a risk taker.
It is due to the fact that the manager purchase and then sells all assets at a slow speed to remain in par with the market movements. As you know high the structural complications, high is the risks. Therefore, the expense ratio is more for the hedge funds when compared to other mutual funds. It ranges from 15% to 20% of all the hedge fund average returns. Therefore, it is often recommended for all initial depositors to steer clear from all of these funds till you get good amount of experience in this field.
Also after that is all is based on the fund manager. Thus, until you have complete trust in the fund manager, making investments in hedge funds can offer you some sleepless nights.
What are the important features and advantages of Hedge funds?
The whole sector of hedge fund is in its initial stage and it got a green signal in the year 2012 when SEBI allowed some alternative investment funds. Here are few important features of Hedge funds:
- Good net worth investors: Only certified investors can make some investments in the hedge funds. They are primarily high net worth individual, insurance companies, pension funds and banks. The minimum size of the ticket for the investors investing in these funds is about Rs.1 crore.
- Varied portfolio: Hedge funds trading have a exclusive portfolio of some investments that ranges from several currencies, real estates, bonds and equities. Mainly they cover all of the assets that is only limited by some of the mandate.
- High fees: The hedge fund performance is based on the concepts of both expense ratio as well as management fee. Internationally it is 2:20 which means 2% is fixed fee and 20% is profit. As for the hedge funds in India, the fee for management can be well below 2% to below 1%. The profit sharing usually varies in between 10% to 15% in general.
- High risks: The investment plan for hedge fund have the risk of exposing the funds to a huge amount of loss. The lock in period for the investment is very long. The leverages used but these funds can easily turn the investments into a high loss.
- Taxation: The hedge funds accounting has still now not got the pass through status on tax. This means that the income that comes from these funds is easily taxable at the level of investment fund. Thus, the tax obligation will never pass through to all the unit holders. This is one of the biggest advantage for the industry as they are not present on the level playing ground along with other mutual funds.
How do hedge funds work?
Returns that comes from the hedge funds stands as a testimony to the skill of the fund manager instead of the market conditions. The managers of the asset perform their best to decrease the exposure of the market and create good returns instead of the market movement. They usually work in the small market sectors to decrease the risks by more variations. A hedge fund managers make use of the following strategies:
Sell short: In these strategy the manager in a hope that the price will drop sell the shares to purchase in future at less price.
Make use of arbitrage: During sometime the securities have some of the contradictory pricing. Managers utilize this for their benefit.
Making investment in the future events: Here some of the major market events such as acquisitions, spin-offs can influence the decision of the manager’s investment.
Now let us know about hedge fund vs private equity funds
Hedge funds mainly have an aggressive stance on the investments and bring high returns making use of the speculative points and hedge funds trading in various options and derivatives. They can undertake some of the short positions in the whole market but the private equity funds cannot. In the other hand private equity fund are generally safe as they do not have much leverage but hedge fund possess big amount of leverage and thus possess high risk.
But selecting wisely and checking whether the strategy functions good for you or not. Hedge fund is one of those investment avenues and it usually takes deep insight study to get access various options.
FAQs (Frequently Asked Questions)
Are hedge funds bad?
Hedge funds are not necessarily bad, but they are a risky investment. Thus, someone who has some surplus money and can take some risks for their hedge fund is good. But with proper strategy and market conditions, hedge fund gives good returns.
Do hedge funds beat the market?
Hedge funds have the potential to give you high returns, specifically in the bear market. If a person outlook for the market is not good, you will require a specific reason to get a hedge fund to beat the whole index. The issue is that hedge fund returns never follow the symmetrical return.
Are hedge funds regulated?
Yes, Hedge funds are regulated, but all of the regulations are quite different from all of the other investment market. If you can make any investment in the hedge fund, you should do some research on the qualifications of the fund manager properly. Moreover, the future of the hedge fund industry constantly changes.
Are hedge funds high risk?
Generally, hedge funds are mainly considered high-risk investments because of the enormous potential for loss of money. Wholesome experience a significant amount of loss in money through hedge funds because of the concentrated plan. Some other experience significant gains.
Are hedge funds legal?
In legal terms, hedge funds are often set up as private investment limited partnerships that are also open to a limited number of attributed investors and needs a bog initial minimum investment.