What Do You Mean By Hedge Funding?

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Monday, October 18, 2021 / 11:50AM / Lucas Arlo /Image Header Credit: Oriental News Nigeria

 

A hedge fund is a type of alternative investment that combines money from individual and institutional investors to invest in a wide range of assets, typically using sophisticated strategies to create a portfolio and manage risk. Hedge funds can invest in a variety of assets, including real estate, currencies, and other alternative assets, which distinguishes them from mutual funds, which typically exclusively invest in stocks and bonds. Regardless of whether the market is rising or falling, the goal of all hedge funds is to maximise investor returns while minimising risk.

 

Understanding the Strategies for Hedge Funding

When compared to mutual funds, hedge funds are thought to be more aggressive and riskier. This is due to their investment strategy. While each hedge fund will have its own investing strategy, the term 'hedge fund' refers to the fund manager's (or general partner') authority to use specific trading strategies, such as shorting stocks (if they predict a market collapse) or 'hedging' themselves by going long (if they foresee a market rise).

 

As you can see, a lot hinges on the fund manager's CARL ability to predict market movements and respond appropriately.

 

What are the Features of Hedge Funds?

The hedge fund business in India is relatively new, with the Securities and Exchange Board of India (SEBI) approving alternative investment vehicles in 2012. (AIF). They possess the following characteristics:


  • Investors with a High Net Worth

Hedge funds can only be invested in by certified or accredited investors. High-net-worth individuals (HNIs), banks, insurance firms, endowments, and pension funds are the primary players. Investing in these funds requires a minimum ticket size of Rs 1 crore.


  • Diverse Portfolio

Hedge funds have a diverse range of investments, including currencies, derivatives, stocks, real estate, equities, and bonds, among others.


  • Fees are Increasing.

They are concerned with both the spending ratio and the management fee. It's 'Two and Twenty' across the world, which means a 2% fixed charge and 20% profit share. The management fee for hedge funds in India can range from less than 2% to less than 1%. In average, profit sharing ranges from ten percent to fifteen percent.


  • Increased Risks

Hedge fund investment strategies might result in significant losses. The average investment lock-in time is rather long. These funds' use of leverage might result in substantial losses on investments.

 

What are the Different Types of Hedge Funds?

Because hedge funds are private investment entities, they may do pretty much whatever they want as long as they are honest with investors about their strategy. (Normally, the investment plan is stated in a prospectus that investors must read before investing.) While having this much leeway might be dangerous, it also gives hedge funds a lot of freedom.

 

Hedge fund strategies can concentrate on one or more of the following:

  • Macro - invests in stocks, bonds, and currencies in order to profit from changes in macroeconomic factors (e.g. global interest rates, economic policies etc)
  • Equity - invests in stocks worldwide or locally while shorting overpriced equities to protect against market downturns.
  • Relative-value - takes advantage of inefficiencies in pricing or spread.
  • Manager manipulates fund volatility by changing the board of directors, hiring new management, or pressuring a firm to be sold.

 

In addition, by merging other hedge funds or pooled investment vehicles, a hedge fund might pursue a "fund of funds" strategic strategy. The goal is to deliberately combine the underlying strategies and funds to better control the umbrella fund's volatility, risk, and returns.


 

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