Hedge fund is a type of private and unregistered investment-pool that employs sophisticated hedging and arbitrage techniques in both domestic and international markets to generate high returns.
Traditionally Hedge funds have been limited to sophisticated, wealthy investors because they required a large initial investment.
Earlier most of the hedge funds strategies such as leverage, long, short and derivative positions were focused on corporate equity markets. But now hedge funds new focus areas are commodities and money markets.
Because hedge funds are unregistered, they can use securities and strategies that are either prohibited or restricted in registered funds. That is why -hedge funds are also referred as non traditional or alternative investment.
Hedge Fund Structure
- Limited Partner
- General Partner
General partner is the individual or entity that started the hedge fund and handles the fund operation. The general partner typically receives an advisory fee (1% of net assets) performance fee (annual or quarterly), which is a percentage (usually 20%) of the fund’s net capital appreciation.
Limited partner bring in the capital but are not involved in the day-to-day running of the hedge fund.
The major difference between Hedge funds and Mutual funds are: –
- Structure: Mutual funds are highly regulated. In India SEBI is the regulator whereas in U.S SEC is the regulator.
Investment Strategies: mutual choices of investments are limited. Mutual funds can’t have short positions in securities.
Transparency: There are several mutual fund rating agencies. Mutual funds also publish their N.A.V. However no such rating agency exists for hedge funds.