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Hedge Fund: Meaning, Strategies, Investment Explained

hedge funds

Are you looking for investment options beyond traditional assets like stocks and bonds? Many Indian investors are now searching for smarter, more flexible ways to grow their wealth. For high-net-worth individuals (HNIs), hedge funds have emerged as an alternative offering potential returns higher than conventional assets.

Yet, for most people, hedge funds remain misunderstood, exclusive, and complex.

So, what is a hedge fund, and how does it work? Let us explore the hedge fund meaning, strategies and regulations in India.

What is Hedging?

Hedging is an investment strategy to protect profits or limit losses of one asset by buying or selling another asset. In other words, it is when investors protect their investments from future price movements.

It is a popular risk management technique in which a hedge position is taken in the opposite direction to protect investments. Ideally, it involves investing in two different investments with a negative correlation. The most common hedge fund example is car insurance. Everyone takes car insurance to protect their car against damages and accidents.

Hedging is used by traders, institutional investors, and asset managers to reduce the impact of volatility. Although it doesn’t eliminate risk entirely, it just aims to reduce the impact of the negative consequence.

What is a Hedge Fund?

A hedge fund is an investment product formed by pooling investments from multiple investors. These privately pooled funds earn high returns by investing in non-traditional assets. They can invest in commodities, derivatives, currencies, real estate, bonds, equities, to name a few.

Hedge funds in India are classified under Category III of the SEBI (Alternative Investment Funds) Regulations 2012. They became legal and regulated only in 2012. Hedge funds in India are still in the early stages and face heavy taxation and lower regulatory clarity, which has slowed their growth compared to their global counterparts.

Many people wonder how to start a hedge fund in India? The corpus must be at least ₹20 crore and a minimum investment of ₹1 crore from each investor.

Features of Hedge Funds

Here are some important features that distinguish hedge funds from traditional investment vehicles:

Category III AIFs are taxed at the fund level, meaning investors (unitholders) are not directly liable to pay tax on returns. Instead, taxes are deducted before profits are distributed, lowering the net returns investors receive.

How do Hedge Mutual Funds Work?

Hedge fund investment returns show the fund manager’s ability to offer high potential returns in any market situation. A hedge fund manager plays a vital role in earning returns. 

The fund strategy often involves more than one manager managing the investments. Investors get personalised service from these managers, as much research goes into this before they choose an asset for investment. Managers use multiple strategies from time to time to earn good returns.

Hedge Fund Strategies

Here are some common strategies they use. 

Who Can Invest in Hedge Funds?

Not everyone can invest in hedge funds. These are meant for sophisticated investors, such as:

Since it has a minimum investment of ₹1 crore, these funds are not accessible to retail investors. Investors should also be prepared for high risk, low liquidity, high tax and complex fee structures.

Advantages and Disadvantages of Investing in a Hedge Fund

Advantages

Disadvantages:

Final Thoughts

Hedge funds are powerful investment vehicles for those who understand the risks and can afford the high entry barriers. With complex strategies and the potential for high returns, they can offer diversification and exposure beyond traditional markets. 

However, before investing, due diligence, understanding the hedge fund manager’s approach, and considering tax implications are important. If you’re exploring hedge fund investment in India, make sure you are financially equipped and are comfortable with high-risk.

FAQs

What is the minimum amount required to invest in a hedge fund?

The minimum investment amount required from each investor in a hedge fund is ₹1 crore.

Who regulates hedge funds in India?

Hedge funds are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012.

Are hedge funds risky?

Yes, hedge funds use aggressive strategies and leverage, making them riskier than mutual funds. While they aim to hedge risks, they can still suffer significant losses.

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