A hedge fund is an aggressive portfolio of investments that can take both long, short and derivative positions, use arbitrage, buy and sell undervalued securities and invest in almost any opportunity in both domestic and international markets with the aim of generating high returns at reduced risk.
How are they managed?
The manager of hedge fund, the person who created it, is paid a percentage of profits he earns on the money investors have deposited with his company. He appoints custodian and fund administrator who deals with the investors. Investors pay subscription amount to the custodian, he confirms receipt of payment to fund administrator. Fund administrator issue shares to investors. After getting entire subscription amount, investment manager invest those funds in the market with the help of custodian and prime broker.
How do they invest?
- Long/short equity - they aim to profit from decent research and stock picking skills by buying the best ideas and reducing the resulting stock market exposure by shorting i.e. selling those stocks they do not own which they believe will perform less well.
- Trading strategies - they implement various trading strategies by taking positions on the direction of markets, currencies and commodities.
So, hedge fund managers are essentially a group of active investment managers who invest in a variety of asset classes, with the licence to invest in a very flexible way.
Hedge Funds in India
Hedge funds in India have struggled to find their place. There is not any regulatory body for hedge funds in India so far. There are some foreign companies who are providing hedge funds services in India such as HFG India Continuum Fund (New York based), Avatar Investment Management (Mauritius based), Indea Capital Pte Ltd (Singapore based), etc. Fund Managers of these companies seek to achieve long-term capital gains by investing in Indian public and private equity markets.