Hedge funds in the context of investing means safeguard against risks. It uses the funds collected from accredited investors like insurance firms, banks, high net worth individuals, pension funds and endowments. Because of this only these funds function as private investment partnerships or overseas investment corporations.
SEBI (Securities and Exchange Board of India) allowed (AIF) alternative investments funds then it got green flag in 2012. This industry is not so old. They have the following features:
These funds have a wide portfolio of investments ranging from investments in derivatives, currencies, stocks, equities, real estates and bonds. They cover mostly all the asset classes.
Accredited or qualified investors can invest in hedge funds. It uses the funds collected from accredited investors like insurance firms, banks, high net worth individuals, pension funds and endowments. The minimum amount that one can invest in these funds is Rs. 1 crore.
They work on the concept of both management and expense ratio fee. There is a 2% fixed fee and 20% of profits so globally it is “two and twenty”. In India, the management fee can be 1% and profit sharing varies between 10% to 15% generally.
The strategy of these funds can tend to huge losses. Lock in period for the investment is relatively long. Purchase used by hedge funds can turn investment into a significant loss.
It is not mandatory that you have to register these funds with the securities market regulator and also you don’t have to report requirements including regular disclosure of NAV.
Hedge funds are still not given pass-through status on tax. This clearly shows that income from these funds is taxable. Hence the tax obligations will not pass through to the unit-holders. This is the main disadvantage that they are not on a level playing ground with other mutual funds.
Hedge funds generally seek higher returns using speculative positions and have an aggressive stance on their investments. They can take short positions in the markets, while mutual funds cannot. Short selling gives those benefits in the falling market but mutual funds don’t.
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Mutual funds are accessible to the large group of people whereas hedge funds are available only to High net worth investors. Hedge funds aim higher returns and are comparatively high-risk funds compared to mutual funds. It takes an in-depth study to assess different options and it is one of the investment avenues.
Hedge funds contain high risk than mutual funds because they have a huge amount of leverage compared to mutual funds.
These funds are shared subsidizes that are secretly overseen by specialists. Hence, they will, in general, be a bit on the costlier side. Consequently, they are reasonable and attainable just for the monetarily wealthy. You not just must be somebody with surplus assets yet, in addition, a forceful hazard searcher.
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