What is a Hedge Fund?

• 7 February 2017 | 1403 Views | By Mint2Save

As per SEBI, there is no exact definition to the term “Hedge Fund”; it is perhaps undefined in any securities Laws. There is neither an industry wide definition nor a universal meaning for “Hedge Fund”.

As per Forbes, Hedge Fund refers to: a fund that may employ a variety of techniques to enhance or increase returns, such as both buying and shorting stocks based on a valuation model.

Hedge funds are generally distinct from mutual funds as their use of leverage is not capped by regulators and distinct from private equity funds as the majority of hedge funds invest in relatively liquid assets.

All over world Hedge Funds work on profit sharing basis what is called as performance fees.

In India, SEBI has given strict guidelines for hedge fund which makes growth of this industry at very slow pace. Further, it has already placed the SEBI SCORES, to address any investment based grievances of the investors.

A fund with total cap minimum of which is 20Cr and individual cannot invest less than 1Cr.

In India we are not following that investment culture. We are ready to invest in cars, property, gold, diamond but when it comes to stock market we become fearful. So in short no industry for hedge fund in India.

Top 10 Hedge Fund Firms

Eligibility for Hedge Fund

Hedge funds aren’t for everyone. If you don’t meet the SEC’s definition of an accredited investor or sophisticated investors, you can’t invest in a hedge fund & some hedge funds go beyond the SEC requirements, making sure that all investors are qualified purchasers.

Now let us understand what an Accredited Investor means?

An accredited investor is an individual who can enter into a hedge fund due to his or her financial standing. An investor is considered accredited if he or she meets any of the following criteria:

• Has a net worth of more than $1 million, owned alone or jointly with a spouse
• Has earned $200,000 in each of the past two years
• Has earned $300,000 in each of the past two years when combined with a spouse
• Has a reasonable expectation of making the same amount in the future
• For investment institutions, such as pensions, endowments, and trusts, the primary qualification is having $5 million in assets.

Hedge Funds in India

With the notification of SEBI (Mutual Fund) Regulations 1993, the asset management business under private sector took its root in India. In the same year SEBI, also notified Regulations and Rules governing Portfolio Managers who pursuant to a contract or arrangement with clients, advise clients or undertake the management of portfolio of securities or funds of the client. We have however, no information about any hedge funds domiciled in India. Further, on account of limited convertibility, offshore hedge funds have yet to offer their products to Indian investors within India. Recently, RBI through liberalized remittance scheme, allowed resident individuals to remit upto US $ 25,000 per year for any current or capital account transaction. The liberalized scheme will allow Indian individual investors to explore the possibility of investing in offshore financial products. Considering the existing limit being only US $ 25,000 per year, Indian market may not be attractive to hedge fund product marketing. As long as there will be restriction on capital account convertibility, foreign hedge funds, by virtue of their minimum investment limit being $ 100,000 or higher, do not seem to be excited to access investment from Indian investors in India. It may be clearly understood that the suggestions put forth in the following paragraphs are in no way aimed at allowing foreign hedge funds to mobilise investment from India by offering their products to Indian investors. Therefore regulatory issues related to investor protection have not been considered for this Report.

Some hedge funds have invested in offshore derivative instruments (PNs) issued by FIIs against underlying Indian securities. Through this route hedge funds can derive economic benefit of investing in Indian securities without directly entering the Indian market as FIIs or their sub-accounts. Through recent amendments to the FII Regulations (Regulation 15A and 20 A), the regulatory regime has been further strengthened and periodic disclosures regime has been introduced. As at the end of March, 2004, 37 total investment by hedge funds. In the offshore derivative instruments (PNs) against Indian equity, are Rs. 8050 crores which represent about 8% total net equity investments of all FIIs. On the basis of market value, the hedge funds account for about 5% of the market value of the total assets held by the FIIs in India. The fiscal year (2003-2004) has seen a spectacular increase in FII activities in Indian market. Till this report is filed FIIs have already invested US $ 10 bn. during this year alone which is a record. Robust economic fundamentals, strong corporate earnings and improvement in market micro structure are driving the FII interest in India. Investors all over the world are keen to come to Indian market. From informal discussions with institutional investors including some reputed and well established hedge funds, one could gauge the extent of interest they have about Indian markets. During the discussions they have requested whether India, like other Asian emerging markets, can provide a regulatory framework that will allow them to directly invest in Indian market in a transparent manner. In this context, the following approach may be considered for allowing the well-established hedge funds to invest in Indian markets as a registered entity under the SEBI (Foreign Institutional Investors) Regulations, 1995.

SEBI introduced few terms to research

• Relevant Provisions of FII Regulations
• Identifying Hedge Funds
• Investment Limits applicable to FIIs
• Additional Regulatory Concerns*(Source: SEBI website)

Research data by RBI: Comparative figures for Private Equity and Global Hedge Funds (2007)

*: In US; **: Global Hedge Fund Index.

Source: IFSL, CBS Hedge Funds, 2008.

Popular Misconception: The popular misconception is that all hedge funds are volatile that they all use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities, and gold, while using lots of leverage. In reality, less than 5% of hedge funds are global macro funds. Most hedge funds use derivatives only for hedging or don’t use derivatives at all, and many use no leverage.