Hedge Funds Compare

Additional Useful Information

• Suitable for investors who have a high-risk tolerance and have lots of excess capital. It is also recommended that only experienced investors invest in hedge funds.

• SEBI (Securities and Exchange Board) does not strongly regulate hedge funds and has no legal obligations.

• The minimum investment required to invest in a hedge fund via an AIF is ₹1,00,00,000.

• There is generally a lock in period of 3 to 5 years.

• Lock-in periods for hedge funds typically vary from several months to several years, depending on the specific hedge fund.

• Hedge funds have a dual fee structure.
• The first component - Management fees where a fixed fee per year is charged as management fee. The fee is around 2%, charged regardless of any profit generated.
• The second component - Hedge funds companies claim a certain percentage of the profit as their own known as performance fees. For example, if the performance fee is 20% and the overall profit of the investor is ₹1,00,000, hedge funds claim and keep 20% i.e., ₹20,000. The remaining ₹80,000 is returned to the investor.

• Alternative Investments in India are typically complex investments and cannot be directly invested in.

Returns *

• Hedge funds do not guarantee returns. However, they have the potential to generate higher returns as compared to other investment options. Although they have a larger downside at the same time.

• Since hedge funds use a wide range of complex strategies and have investments in different investment modes, it is difficult to compare their returns to a specific benchmark.

• The returns generated by hedge funds can be highly dependent on the skill of the fund manager. They vary from fund to fund. Sufficient due diligence should be done before investing in the hedge fund.

Risk Level

• Hedge Funds are high to very high-risk investments.

• Hedge funds use risky and complex trading strategies such as leveraging, short-selling, and options trading. These are understood only by a few qualified and experienced investors.

• Since hedge funds involve a lot of leverage, losses and gains are magnified. This makes hedge funds high risk investments. Hedge funds are high-risk, high reward investments.

• Hedge funds are subject to liquidity risk since the desired liquidity may not be available for investors.

• Manager level risk is also a risk that applies to hedge funds. Managers are the key decision makers and apply complex strategies.

Liquidity

• Hedge funds are relatively illiquid because most hedge funds come with a lock in period.

• Since the tax liability is on the fund, the fund may impose restrictions on liquidating investor holdings. This is the primary reason as to why hedge funds may end up being relatively illiquid.   

Interesting Facts

• Hedge funds in India are known as Alternative Investment Funds (AIFs) Category 3. They can be purchased indirectly through AIFs. There is no direct way to invest in hedge funds in India.

• Hedge funds have very few disclosure requirements. They do not need to disclose their NAV or get registered with SEBI to come into effect.

• Hedge funds are also not required to disclose their past performance records.

• Hedge funds in general do not have a high correlation with equity and debt investments. This is why exposure to hedge funds results in good diversification benefits.

• Hedge funds involve a lot of short selling and trading in derivatives. This is why only experienced investors indulge in hedge funds.

Tax Implications

• Hedge funds are subject to all the types of tax applicable to equity investment options such as short-term capital gains, long term capital gains, etc.

• Hedge funds in AIFs under category 3 are taxed at the fund level, which means taxes on any profits made are to be paid by the fund itself, not the investors.

• This is one of the reasons hedge funds of AIFs under category 3 are not very prevalent in India.

Where To Invest

• https://vivritiamc.com/alternative-investment-funds/

• https://www.pmsaifworld.com/what-are-alternative-investment-funds-aif/