Definition: Hedge fund is a private investment partnership and funds pool that uses varied and complex proprietary strategies and invests or trades in complex products, including listed and unlisted derivatives.
Put simply, a hedge fund is a pool of money that takes both short and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies, convertible securities, commodities and derivative products to generate returns at reduced risk. As the name suggests, the fund tries to hedge risks to investor’s capital against market volatility by employing alternative investment approaches.
Description: Hedge fund investors typically include high net worth individuals (HNIs) and families, endowments and pension funds, insurance companies, and banks. These funds work either as private investment partnerships or offshore investment corporations. They are not required to be registered with the securities markets regulator and are not subject to the reporting requirements, including periodic disclosure of NAVs.
There are many strategies a hedge fund may use to generate returns. One such strategy is global macros, where the fund takes long and short positions in large financial markets based on the views influenced by economic trends. Then there are funds that work on market-neutral strategies. Here, the goal of the fund manager is to minimise market risks by investing in long/short equity funds, convertible bonds, arbitrage funds, and fixed income products.
Another type includes event-driven funds that invest in stocks to take advantage of price movements generated by corporate events. Merger arbitrage funds and distressed asset funds fall into this category.
As of June 30, 2014, there were 158 alternative investment funds (pooled-in investment vehicles for private equity, real estate, and hedge funds). Some examples of hedge funds include names like Munoth Hedge Fund, Forefront Alternative Investment Trust, Quant First Alternative Investment Trust and IIFL Opportunities Fund. There are others such as Singlar India Opportunities Trust, Motilal Oswal’s offshore hedge fund and India Zen Fund.
The minimum ticket size for investors putting money in these hedge funds is Rs 1 crore. According to Eurekahedge India Hedge Fund Index, which tracks hedge funds in India, the category generated 5.07 per cent return in 2015 compared to 38.84 per cent logged in 2014.
