Ultimate Guide to Hedge Funds in India

Introduction 

Hedge funds are often confused with mutual funds by inexperienced investors. However, this is not the case. At the turn of the century, the use of hedge funds in India has grown at an exponential rate. Hedge funds, like mutual funds, aggregate money from investors, but unlike mutual funds, they have more discretion to invest aggressively for larger returns. Higher returns might be measured against a specific market benchmark or by themselves in absolute terms. As a result, hedge funds seek to increase returns by utilizing the power of derivatives in both domestic and international markets.

At the beginning, not every investor in India will be able to access hedge funds. Because, unlike mutual funds, they are not as heavily regulated by the government. Hedge funds are subject to fewer regulations than most other types of investing.

Hedge funds employ a variety of tactics in order to achieve larger returns than the market average. Market neutral, long-short equity, merger arbitrage, and volatility arbitrage are some of the strategies used by hedge funds in India.

Hedge funds’ portfolios often include bonds, stocks, currencies, derivatives, and other convertible instruments. As a result, hedge funds in India are more commonly referred to as alternative investments. Hedge funds are designed to protect an investor’s money from market volatility by hedging (hedging is an investment made with the goal of minimizing the risk of adverse price changes in an asset). As a result, they require unconventional and aggressive management.

What are Hedge Funds in India?

As a general rule, hedge funds are mutual funds managed by private specialists in India. They are more expensive to invest in, and the fees are also greater. The most important point to remember is that hedge fund investments in India are not protected by SEBI. Hedge funds in India are better suited to experienced investors and those who are financially well-off. Hedge fund investors must have a large amount of money and a high risk tolerance because hedge fund managers purchase and sell holdings at a far higher frequency than stock and mutual fund managers.

To understand hedge funds in India in more detail, it is important to know what does SEBI consider as alternative investments: 

The first category is:

Alternative investment funds that provide early-stage initiatives, startups, SMEs, social ventures, or other areas that the government deems attractive economically or socially are included in this category.

The Second Group:

These are alternative investment funds, such as debt or private equity funds, that are not subject to any government or other recognized regulator concessions or incentives.

The third category is:

These are alternative investment funds that trade and invest using complex techniques and formulae. They can use both listed and unlisted derivatives as leverage. Hedge funds that are employed for short-term and/or higher gains and do not receive any concessions or explicit incentives from the government or any other recognized regulator fall into this category.

It’s worth noting that there is no precise definition for hedge funds in India’s securities regulations. If an investment instrument meets some fundamental requirements, it can be identified as a hedge fund.

Also Read: Explanation of Cryptocurrency’s Future

How Do Hedge Funds Work in India?

In India, identifying and distinguishing hedge funds is not difficult. Keep an eye out for the following traits:

  • Hedge funds typically have more stringent investing criteria. Keep in mind that hedge funds are only available to experienced investors and established businesses. A hedge fund’s minimum investment is usually 1 crore. There is also a limit on the number of investors a hedge fund can have, which is usually set at 1000. If you wish to build your own hedge fund, you’ll need a minimum of 20 crores in the bank account.
  • Hedge funds in India, like some mutual funds, have a lock-in period. These are usually for a one-year period. Hedge funds in India can only be withdrawn in installments following the lock-in period. These payments could be made twice a month, four times a year. The frequency is determined by the hedge fund scheme.
  • Because the amount invested in hedge funds in India is large, the fund manager’s fees are also large. They typically receive a 1% fee on the entire asset they manage, as well as 10% to 15% of the investment created over the year. If you are considering investing in a hedge fund in India, you should review the fee structure carefully because hedge funds are more sophisticated than equities or mutual funds.
  • There is no precise benchmark against which hedge fund performance in India may be judged, just like stocks or mutual funds. As a result, hedge funds are referred to as absolute returns, and you should evaluate the fund based on its rate of return.
  • SEBI is in charge of establishing the precise standards for hedge funds in India.

Hedge funds in India are typically the result of the manager’s abilities. It all depends on how aggressively and strategically they invest. Their goal will always be to decrease their exposure to market volatility while generating the best potential profits. They diversify the money and distribute them primarily in niche markets. Hedge fund managers engage in the following activities:

  • The manager may sell some shares at the current price in the hopes of acquiring them at a lower price in the future.
  • Hedge fund managers in India frequently take advantage of inefficient pricing of various securities.
  • They could use the money toward a large forthcoming event like mergers, spin-offs, or acquisitions.
  • The hedge fund manager in India may be able to locate corporations willing to sell their securities at a reduced price in order to alleviate the company’s financial difficulties. The manager may decide to invest the assets there after analyzing the options.

Differences Between Mutual Fund and Hedge Fund

Although both are financial products, there are several key differences between them. If you wish to advance in your investment path in India, you must first comprehend the differences between mutual funds and hedge funds:

Sr. No. Hedge Funds  Mutual Funds 
1 The hedge fund manager almost always actively manages the funds. Active management of investments involves a constant effort to beat the highs of the lows of the market by specifically picking certain pathways to investments.  The mutual fund manager may actively or passively manage the pool of funds. Passive management of investments involves mimicking the return of a particular index by purchasing some or all the holdings of the index.
2 Hedge funds in India are not accessible to the mainstream, common investors. There are certain limitations for investors to be eligible to be a part of hedge funds. For instance, a minimum net-worth of crores may be necessary for an individual to invest in hedge funds.  Mutual funds are one of the easiest forms of investments for the common public. In India, the public can invest in mutual funds for as low as INR 100. Even the sign-up for mutual funds can happen with a set of basic identity proving documents. 
3 The expenses of hedge funds are much higher than mutual funds. To put in context, the expenses of a hedge fund is more than 2%. Hedge funds also may take a certain percentage of the profits made by the investors through the fund. Mutual funds have lower expenses, most of the time, less than 1%. They do not take any percentage of the profits made by the investors through the fund. 
4 The design of hedge funds is such that they can provide gains and returns even during an economic decline or a recession. Even during a bear market, a hedge fund might return around 4% – 5%. In this same scenario, a stock fund might reduce by 10%.  On the other hand, the performance of mutual funds strongly reflects the performance of the market. If the economy is going through a recession, typically mutual funds also give little or negative returns.
5 If you are a high-net worth individual and are eligible for hedge funds, it could be a good option for you if you can afford the expenses and profit sharing. If you are the common public, mutual funds are a great way to get exposure to the stock market, by investing as little as INR 100.

Differences Between Hedge Fund and Private Equity 

Hedge funds and private equity funds are both risky investment vehicles. In exchange for an ownership stake in the company, private equity funds invest in private companies or start-ups. The funds supplied to the private company could be used to improve the company’s business, expand it, or streamline its operations. The majority of private equity investors are large corporations or accredited investors because private equity requires large funds.

Sr. No. Private Equity Funds  Hedge Funds 
1 Since private equity funds invest in private companies, they have more influence in how these assets are managed  Although hedge funds invest high capitals, the influence on how the assets are managed are less
2 The private equity funds are more long-term investments. They invest in companies and start-ups with the aim of getting returns in the long-run through the progress of the company Hedge funds in India are held for short or medium spans of time. Hedge fund companies are involved in portfolios that provide quick returns. 
3 Compared to hedge funds, private equity funds are not that risky. There is a comprehensive due diligence done before any investing for equity Since hedge funds aim to provide greater returns on short span of time, the hedge funds in India are considered riskier
4 The amount you get from private equity funds is free from tax  The amount you earn from hedge funds in India is taxed
5 Investors actively participate in the company functioning, in private equity funds  Investors in hedge funds are only passively involved 
6 The management takes around 1% or 2% of the financial assets that they manage actively The management takes around 1% or 2% of the financial assets that they manage, and they may even take a share of the investors’ profits
7 The private equity funds exit from an investment by selling their stakes in the company  The hedge fund management companies exit by selling the owned securities in a public exchange for stocks 
8 The private equity funds can invest 100% in another company  Hedge funds in India holders are typically minor shareholders and they can make a 50% investment maximum, in a company

Also Read: Starting a Business in India

How To Become a Hedge Fund Manager?

Because you will be actively managing the hard-earned money of investors, being a hedge fund manager is a very responsible job. A hedge fund manager must have critical financial analysis and management abilities and expertise. They must adhere to the fund’s terms and conditions and provide satisfactory returns to clients.

You can start with a Bachelor’s degree in any discipline, but pursuing one in finance is usually preferable. This allows you to start honing your talents right away. B.Com and BBA are two first-year bachelor’s degrees to consider.

Consider enrolling in a Certified Financial Analyst program. For aspiring hedge fund managers, this is one of the most useful courses. Certified Alternative Investment Analyst or Chartered Hedge Fund Associate are two other options. This can assist you in your pursuit of a career as a hedge fund manager.

The MBA is the ideal option if you want to pursue a Masters degree. Consider finance, investment banking, and other specializations.

All the schooling in the world won’t make you a hedge fund manager. To begin, you must develop the requisite skills and information using online and offline resources beginning at a young age. Another crucial step toward becoming a hedge fund manager is to intern in a hedge fund management firm in India, where you can learn about hedge fund abilities and duties. This knowledge is necessary for you to practice professionally as a hedge fund manager.

How To Start A Hedge Fund in India?

If you are a trust, a company, a limited liability company, or a private limited company, SEBI has detailed regulations for registering a hedge fund in India. Check the qualifying criteria for each of these categories you belong to before proceeding.

If you’re a firm, for example, you’ll need to provide a summary of the applicant’s actions. All of the directors’ profiles and shareholding patterns must be shared. This information must be accompanied by verification of the directors’ addresses and identities.

You must show that the company is authorized to operate as an alternative investment fund. This can be accomplished by including a section in the Memorandum of Organization that permits for this type of alternative investment fund.

You must demonstrate whether the Memorandum of Association or any of its clauses limit the company applicant from soliciting public subscriptions for its securities.

To learn more about the exact documents, terms, and conditions for establishing a hedge fund in India, visit SEBI’s website and other trusted legal resources.

The following hedge funds are active in India at the time of writing (June 2021):

Sr. No. Company Name
1 India Capital Fund
2 Indea Capital
India Deep Value Fund
4 Naissance Jaipur (India) Fund 
Absolute India Fund 
Passport India Fund 
HGF India Continuum Fund 
Fair Value 
Avatar India Management
10  Monsoon Value Capital Equity Fund 
11 Atyant Capital
12 Vashishta South Asia Fund Limited
13  Karma Capital Management
14 Atlantis India Opportunities Fund

How To Invest in Hedge Funds in India?

Be mindful of the intricacy of understanding this financial instrument as a whole before approaching a hedge fund company in India. Hedge funds are also dangerous because they seek higher returns in a short period of time. The hedge fund is pricey, with a minimum investment of crores. Finally, you must be prepared for hedge funds to experience dips and highs because hedge fund markets are extremely unpredictable.

Final Thoughts 

If you are eligible to invest in hedge funds in India, do your homework on how hedge funds function, the various hedge funds available in India, and their terms and conditions. If possible, inquire about the experiences of current hedge fund investors. Investing in hedge funds is a significant step in your financial journey, so proceed with caution.

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