A Closer Look at Hedge Funds
Hedge funds, in a more technical sense, are a type of private investment partnership and funds. These funds are collected for the purpose of investment or trade in both listed and unlisted derivatives, employing a variety of hedge fund strategies. While hedge funds and mutual funds both pool cash from investors, hedge funds operate on a more private basis compared to mutual funds. There are three distinct types of hedge funds:
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Macro hedge fund:
This type of fund primarily invests in stocks, currencies, and bonds, with the expectation of profiting from changes in the macroeconomic variables of the concerned country, including global interest rates and changes in national policies.
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Equity hedge funds:
These hedge funds can be global or country-specific. They invest in attractive stocks, but also aim to reduce overvalued equities or stock indices to protect investors from market downturns.
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Relative-value hedge:
This type of hedge fund considers price comparisons as declared by various organizations and market studies. After careful analysis, the relative-value hedge funds invest in the most profitable avenues determined by aggressive growth income, emerging market values, short-selling, etc.
As of 2014, there are 158 alternative investment funds listed as hedge funds in India. Some examples of hedge funds include Munoth Hedge Funds, Forefront Alternative Investment Trust, and IIFL Opportunities Funds.
Roles of Hedge Funds
The functions of hedge funds can be summarized as follows:
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Positive return investment:
Hedge funds operate during both the rise and fall of a country's equity and bond markets.
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Investments in hedge funds are protected due to a reduction in total portfolio risk and overall volatility.
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Hedge fund plans offer flexibility, allowing investors to customize their investment needs and patterns to align with their specific goals through the deployment of various investment strategies.
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Some of the world's best investment managers guide and tailor investment plans to meet the needs of investors.
Despite their potential for high returns, hedge funds do come with their own set of risks. Investors may face substantial losses, especially if they invest a large amount in hedge funds. They also need to keep their money in escrow accounts for several years. Furthermore, compared to mutual funds, hedge funds have lower liquidity. To sum it up, hedge funds operate with minimal regulation and transparency, which increases the risk for investors. Although there's potential for substantial profits, the possibility of a small loss turning into a significant one is also high. Hedge funds are only accessible to a select group of accredited investors, while mutual funds are open to anyone willing to invest. Hedge funds focus on short-term gains, while mutual funds, according to market experts, are far less risky and provide long-term benefits.
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