ARE THEY A GOOD INVESTMENT OPTION?
If you’re curious about hedge funds and what they are — or if you’re wondering if you should invest in one yourself — then this analysis will give you the fundamentals. Learn what a hedge fund is here, how such funds operate and who can be an investor. The first hedge funds in India had been designed to buy long and short stocks. Hence, the positions were “hedged” to minimize risk. And the investors were able to make money irrespective of whether the market was bull or bear. The name stuck and the word grew to include all kinds of pooled structures for money.
MEANING OF HEDGE FUNDS:
Hedging means safeguarding and it means defending against risks when it comes to saving. A hedge fund uses the funds raised by approved investors such as banks, insurance firms, High Net-Worth Individuals (HNIs) & Families, and endowments and pension funds.
This is why they also act as investment companies or private investment partnerships in overseas countries. They don’t need to be registered with SEBI, nor need to regularly report their NAV like other mutual funds.
Hedge funds are mutual funds that are controlled privately by experts. They seem to be a little on the costlier side for this reason. Therefore, they are inexpensive and only possible for the financially well-off.
You need to be not only someone with surplus funds but also an ambitious risk-seeker, that’s because the manager buys and sells assets at dizzying speed to keep up with market movements.
If you know, the higher the sophistication of the system the greater the risks. The cost is therefore much more for hedge funds than standard mutual funds. This can range from 15 to 20 percent of your earnings.
HOW DOES IT WORK?
Returns from hedge funds attest to the potential of the fund manager, rather than the circumstances of the market.
Here, asset managers do their best to reduce revelation to the market and generate good returns amid market movements. They work to reduce risks through more diversification in small market sectors.
Some of the approaches used by the managers include:
- Sell short: Here the seller will sell shares to buy-back at a cheaper price in the future, hoping the prices will decrease.
- Using arbitrage: The price of the securities can often inconsistent or inefficient. Managers use it for their benefit.
- Investments in high discount securities: Many businesses are struggling with financial hardship or insolvency and are selling their shares at extremely low rates. After weighing the possibilities, the manager will decide to buy.
- Investing in an impending announcement: including certain major market events such as acquisitions, mergers and takeovers will affect the investment decisions of managers.
TYPES OF HEDGE FUNDS:
There are various types of hedge funds such as:
- Market-neutral hedge funds: these funds protect the amount in the hedge from the bullish or bearish market situation.
- Event-driven funds: certain events such as corporate behavior or political developments that influence stock market prices. In market inefficiency, the hedge fund manager seeks income.
- Macro funds: investment in extremely risky stocks, bonds or currency.
- Equity hedge: Equity hedge Fund Investment consists of a central portfolio in long hedged equities with short stock sales and/or stock index options at all times.
In a hedged structure, some managers hold a substantial portion of assets and usually employ leverage. Where short sales are used, hedged assets can consist of an equal value of long and short stock positions.
Various other hedge funds are long-only hedge funds or short only hedge funds and distressed securities, etc.
ARE THEY A GOOD INVESTMENT FOR COMMON INVESTORS?
Hedge funds have different strategies, returns, and fees and typically managers have the freedom to adjust the strategy or assets of the fund without alerting shareholders.
Some of these funds’ managers focus on raising the returns while others provide diversification such as having exposure to cryptocurrencies.
It is usually a very large pool of investment for instance 200 crore or 400 crores. Mostly financially well-off investors who are looking to diversify their portfolio and have the risk-taking ability to invest in them.
If you’re asking if it is a decent investment for a common man? the answer will be no. Not because common man doesn’t like this kind of money management, but the limitation is with the concept of such type of funds. It tends to have fewer partners with maximum pooled funds possible.
If you want to have control over your investments and cannot invest more than 1 crore, then a hedge fund is not a good option for investment.