Do Hedge Funds Hold Something For You?

The hedge funds have seen exponential growth in the last two decades and have become a global phenomenon. yet it is still an underexplored segment of funds in the Indian market. With an increase in awareness about personal finance, the Indian market has seen massive growth in the number of investors taping into the new territory. Hedge funds are still in an emerging phase in India and are not as widely known as other class of mutual funds. Though like other mutual fund classes these funds also collect funds from investors that is where the similarity ends. The hedge fund uses highly complex strategy to hedge the risk and generate higher returns. In this article, we will be discussing hedge fund with context to the Indian market and will be discussing the major factors about it.

What are Hedge Funds? 

As the word "Hedge " itself suggests it means to safeguard and in context to the investment and in financial terms it means to safeguard against the risk. Like any other mutual fund, hedge funds also have a fund manager who manages all money or funds collected from the various investors. A hedge fund uses money collected from various accredited investors like banks, financial institutions, Insurance companies, families and individual high net worth investors ( HNI) and all other high-risk appetite investors. These funds do not need to be registered with SEBI, nor do they need to disclose their NAV periodically like other mutual funds. 

The hedge fund portfolio consists of various asset classes like equity, bonds, currencies, commodities and even derivatives and arbitrage. Hedge funds are managed actively and aggressively to consistently safeguard the assets against the risk of upward and downward movement of the markets. 

unlike other aggressive mutual funds such as equity funds, hedge fund takes leverage in the market, regardless of whether the stock market has climbed higher or declined, the managers can "hedge" themselves by going long (if they foresee a market rise) or shorting stocks (if they anticipate a drop). They hold both long and short positions, including the position in listed and unlisted derivatives.

Are Hedge funds for you? 

Hedge funds are managed by an expert fund manager privately and that's the reason these a bit more on the costlier side. The fund manager or the expert design the fee structure and practice it solely. Hence, these funds are feasible only to financial well- of and rich investors, who have large pockets and some extra funds to shred. As these funds come with a high-risk factor, a new or first-time investor is advised to stay away from these funds. You not only have to be someone with surplus funds, but also an aggressive risk-seeker. This is because the manager buys and sells assets at an unpredictable speed to keep up with the market movements.

A well-known term of the investment world, high risk- high return suits these fund completely. Hence, due to these high risk and high return concept, these funds come with a high expense ration usually raging between 15- 20 %. 

Hence, unless you have patience and full faith in your fund manager that he can sail you through the ups and downs of the market. It is recommended to stay clear of these funds. 

How does Hedge fund work?

 The return from the hedge fund is evidence of the efficiency of the fund manager's skills and calls. The fund managers try their best to elevate their position and generate a good return despite the market conditions. For this fund manager adopts various complex strategies, some of which are as follows:

a. Long position

A long position refers to the buying of stock, commodity or currency with the expectation that the asset will rise in its value in the future.  In the context of options, long is the buying of an options contract. An investor that expects an asset’s price to fall will go long on a "put option", and an investor that hopes to benefit from an upward price movement will be long a "call option".

b. Short option or sell short option.

The fund manager hoping to the prices to drop will sell the shares to buy- back the shares in the future at a lesser price.

c. Forecast and invest in some major event 

The manager keeps looking for opportunities like merger and acquisition, spin-offs, internal reconstruction etc to invest and the growing trails.

There are many other such strategies like taking an arbitrage or investing in the securities available at discount. All these strategies are solely published by the calls taken by the fund manager. Hence, expertise, vision and experience of the hedge fund manager play the key role in the success of any hedge fund.

Hedge Fund or mutual fund whats better?

No doubt both hedge funds and other mutual funds are a great instrument for wealth creation and long term investment. So, there isn't any right or wrong in between these two.  The call whether to invest in a hedge fund or any other mutual fund depends upon the investor to an investor based on their pocket size, risk appetite and level of aggression towards the return. However, there are a few points you should consider before taking a call. 

Investment stance: The hedge fund investment call are considered to be more on the riskier side as these funds are more focused on generating a significantly high return. Whereas other mutual funds like debt funds offer a secure and stability of investment with moderate returns.

Leveraging : Mutual funds are considered to be safe as there is no or minimum leveraging of funds.

Taxation:  The hedge funds are categorized as Alternative Investments fund (AIF). The category III AIF (Hedge fund ) hasn't been given a pass through on tax status yet. This means that income or profit generated by the hedge funds is taxable at the fund level and tax obligation will not pass on to the unit holders.