Hedge Fund | What are Hedge Funds and Features of Hedge Funds? Hedge Funds vs Mutual Funds - financebrother

 

What are Hedge Funds?

The hedge fund is a fund collected from certified investors such as banks, High Net-Worth individuals and families (HNI’s), insurance companies, and pension and endowment funds.

Hedge funds are not regulated, hence no need to register with Securities Exchange Boards, nor they have need to disclose Net Asset Value (NAV) periodically like other mutual funds.

Who Invests in Hedge Funds?

They tend to be on a bit costlier side, so that they are out of reach of small investors and affordable only for strong financial well-off investors.

Investors of hedge funds should not only have surplus funds but they also have an aggressive risk seeker, as hedge fund managers buy and sell the securities at dizzying speed to manage the market movements.

Features of Hedge Funds:

1. Accredited and High Net-Worth Investors:

• Only certified high net worth investors can invest in hedge funds.
• They are generally banks, insurance firms, high net worth individuals (HNI’s), pension and endowment funds.
• The minimum entry size for investors to invest in hedge funds is INR 10 million.

2. Charge Higher Fees:

• They charge both management fees and an expense ratio.
•  Worldwide, it works on the concept of “Two and Twenty”, which means being charge a 2% fixed fee and 20% of profits.

3. Portfolio Diversification:

•  Hedge Funds have a diverse portfolio of investments including (derivatives, stocks, currencies, bonds, real-estate and equities.)
• They generally cover all the asset classes available in the market.

4. Regulations for Hedge Funds:

• There is no such requirement for hedge funds to be registered with the securities market regulators and also have no such reporting requirements to disclose their Net Asset Value (NAV)
  

Difference between Hedge funds and Mutual Funds: 

Mutual Funds

• Investment as minimum as INR 100 only.  
• Mutual Funds are available to the general public for their investments.
• They charge only a management fee that normally ranges from around 1%-3%.
• Mutual fund managers avoid making high-risk investments.

Hedge Funds

• Investment should be very high. The minimum of INR 10 million
• Hedge funds are available only to high net worth and certified investors.
• Charge management fee around 2% and also charge 10%-30% of profits.
• Hedge fund managers aggressively invest in high-risk securities to earn more profit.