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Hedge Fund

Posted on September 20, 2022 by admin1  3268

Context

  • The term has been in the news.

What Is a Hedge Fund?

  • A hedge fund is a limited partnership of private investors whose money is managed by professional fund managers who use a wide range of strategies, including leveraging or trading of non-traditional assets, to earn above-average investment returns.
  • Hedge fund investment is often considered a risky alternative investment choice and usually requires a high minimum investment or net worth, often targeting wealthy clients.

Regulatory requirements

  • Hedge funds in India do not need to be necessarily registered with the Securities and Exchange Board of India.

Different types of hedge funds in the market

  • Domestic hedge funds: Domestic hedge funds are open to only those investors that are subject to the origin country’s taxation. 
  • Offshore hedge funds: An offshore hedge fund is established outside of your own country, preferably in a low taxation country. 
  • Fund of funds: Fund of funds is basically mutual funds that invest in other hedge mutual funds rather than the individual underlying securities.

Hedge Fund vs. Mutual Fund

  • Hedge funds differ from mutual funds and hedge funds are not as strictly regulated by the Securities and Exchange Commission (SEC) as mutual funds are.
  • Mutual funds are a practical cost-efficient way to build a diversified portfolio of stocks, bonds, or short-term investments and are available to the general public and average investor.
    • Hedge funds can only accept money from accredited investors which includes individuals with an annual income that exceeds $200,000 or a net worth exceeding $1 million, excluding their primary residence.
  • A hedge fund can invest in land, real estate, stocks, derivatives, and currencies while mutual funds use stocks or bonds as their instruments for long-term investment strategies.
  • Unlike mutual funds where an investor can elect to sell shares at any time, hedge funds typically limit opportunities to redeem shares and often impose a locked period of one year before shares can be cashed in.

Source: LM

 
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