Meaning:

Hedge funds, including fund of funds, are unregistered private investment partnerships, funds, or pools that may invest and trade in many different markets, strategies, and instruments (including securities, non-securities, and derivatives) and are not subject to the same regulatory requirements as mutual funds, including mutual fund requirements to provide certain periodic and standardized pricing and valuation information to investors. A hedge fund’s purpose is to maximize investor returns and eliminate risk.

Hedge Funds and Mutual Funds:

Both Hedge Funds and Mutual Funds issue units or securities to investors, hold pools of securities to diversify investment, have a professional asset, managers and may have similar investment strategies.

But mutual funds are registered with securities markets regulators and are subject to the provisions of the relevant regulations such as offer/issue of units/securities, disclosure and reporting requirement, valuation for the purpose of computation of NAV, conflict of interest issue and limit leverage. On the other hand, they are not required to be register and therefore, are not subject to similar regulatory provisions.

Hedge Funds and Securities Laws:

Hedge Funds are categorize as Category III Alternative Investment Funds (AIFs) by SEBI. SEBI laid down a framework for AIFs in 2013 which state that category III AIFs are allow to benefit from rising stocks (going long) or falling stocks (going short), although

some funds in this category are long only. They are also allow to take on leverage (borrow money to invest) up to twice their capital.

COVID Impact on Hedge Funds:

Most hedge funds in India do not publicly disclose performance, but an index of the nation’s 14 long-short equity funds compiled

by Eurekahedge shows a 1.3% return this year.

Investment vehicles have given lower than market returns because of the pandemic. However, Indian hedge funds have outperformed their peers in other emerging markets in both April and June. The Eurekahedge Emerging Markets Hedge Fund Index was up 5.17 per cent in April (6.05 per cent for the India hedge fund index), and

5.44 per cent in June (5.79 per cent for the India hedge fund index).

True Beacon One, which manages about 3 billion rupees ($40 million) of Indian equities, has outperformed the NSE Nifty 50 Index by 29%

this year.It is also adding shares of software exporters and

pharmaceutical companies.

Given the current trends, diversification in individual portfolios is both viable and attractive. However, due to less transparency and a fairly new investment option, hedge funds are risky. Their strategy and cost must be closely monitor before making an investment.