All About Hedge Funds in India…!!

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Hedge Funds in India

The capital market has expanded over time in India. The traditional method of investment like gold, metal and real estate is losing their importance to far more complex financial instruments such as equities, bonds, currencies, convertible securities. There are various ways one can invest in these complex financial products. One can either do it directly or through the help of funds. Those who have an idea about these complex products, then they can invest directly, but those who don’t know, they can invest through the help of funds. A fund manager will invest their money and generate considerable returns. There are mainly two types of fund i.e. Mutual Fund or Hedge Fund.  

Most of us are aware of the Mutual Fund. A hedge fund is quite like mutual fund.  The only difference between them is that a hedge fund is quite bigger in proportion with radically fewer restrictions and less regulatory oversight than a traditional mutual fund.  

One is in the market of high risk and high reward. But on the other hand, mutual funds stick to the shallows, where they can catch smaller but more reliable returns.  

Working of Hedge Funds:  

In India, SEBI has categorized hedge funds in India under category III as Alternative Investment Funds. The working of a hedge fund is quite like mutual funds, where a fund manager pool money from various private investors and buy long or short position in equities, bonds, currencies and convertible securities, commodities and derivative products to match the fund’s goal objectives.  A hedge fund may use various strategies to generate returns. But two of the most common strategies is Global Macros and Event Driven. In the case of global macros, the fund manager takes long and short positions in large financial market based on the views influenced by economic trends. Another one is event driven funds that invest in stocks to take advantage of price movements generated by corporate events. The role of these funds is to minimize risk and maximize returns.  

  Hedge Fund Structure in US

(General structure of Hedge Fund in the US, In India, it’s recently launched under Category III of AIF. The structure is not quite clear.)    

Key Features of Hedge Fund:    

  • The hedge funds have wider investment latitude, while mutual funds are stick to bonds and equity.  
  • One of the greatest features about the hedge fund is that they are market neutral. They employ such trading strategies and diversification of a portfolio, where one can expect returns in both market trends.  
  • There are no restrictions on investment avenues, hence they can invest in almost all kinds of financial instruments. More so, hedge funds in India are less regulated compared to mutual funds and other financial instruments.  
  • The minimum amount required for investment in hedge funds in India is Rs 1 crore.    

Types of Investor in these Funds 

As compared to other funds, which are mainly for the retail investor. Hedge fund investors typically are high net worth individuals and families, endowment and pension funds. Apart from that, institutional investors, insurance firms, banks are some of the major entities that invest in hedge funds.    

Hedge Funds Industry in India:  

In India, the hedge fund industry is at a nascent stage. It is estimated that SEBI so called “Alternative Investment Funds “has more than $6 billion overstates the development of the industry in India. An average investor in India has a low risk tolerance as compared to her western counterpart in this field. But there is a lot more to be done to open the market available for other participants. Heavy taxation on the returns of the hedge funds is one of the main reasons behind slow growth. Lesser regulation and better governance will decide the future of hedge funds in India as it will provide a good ecosystem for the growth of the Industry.  

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