What is a Hedge Fund?
In the words of the Securities and Exchange Board of India (SEBI), “including funds of funds, unregistered private investment partnerships, funds or pools that may invest and trade in various markets, strategies and instruments (including securities, non-securities). and derivatives) and are not subject to the same regulatory requirements as mutual funds.
Simply put, Hedge Funds pool money from high-net-worth individuals and large companies to generate high returns and diversify risk. The funds are managed by professional fund managers who follow broad strategies to invest in traditional or non-traditional assets to achieve above-average investment returns.
The investments are often high risk and often made by high net worth individuals.
What is a typical hedge fund fee structure?
Hedge funds charge an asset management fee based on the fund’s net assets versus a performance-based fee. Asset management fees are generally between 1 percent and 2 percent of the fund’s net assets and are paid monthly or quarterly. The performance fee can range from 10 percent to 15 percent of each investor’s net profit for each calendar year. The fee may increase by 20 percent.
So, if an investment of Rs 10 lakh grows to Rs 12 lakh in one year, the payout to the fund is Rs 40,000.
Who Can Invest in Hedge Funds?
Only qualified or accredited investors can invest in hedge funds. They are mainly high net worth individuals (HNIs). The minimum amount for investment in these funds is Rs 1 million per investor and the total fund should have a minimum of Rs 20 million.
History and understanding of hedge funds
The brainchild of AW Jones, the first Hedge Fund, came about in 1952. Hedge Funds were built primarily around two main factors: proprietary investment strategies and access to funds. When many people enter the market, they create their own strategies and then, their own money. With the great economic success of the early 60’s, money also came in. But the success was short-lived; With the recession at the turn of the decade, hedge funds were caught in the crossfire. In the year In 1975, assets under management of hedge funds fell by 70%. New ideas were needed, and a mathematician bought one.
Jim Simon, along with his army of accounting professors, revolutionized the hedge fund industry. He realized that the rest of the hedge funds were making a futile attempt to predict the market movements in the long term; It is not always possible to manage the risk in the market. Instead, it can help market movements in a very short period of time, and this is where Renaissance technology will make their money. Hedge funds have only strengthened since then.
In the year From the relentless speculation of George Soros in the 1990s to the role of hedge funds in the 2008 financial crisis, the role of hedge funds has come under intense scrutiny. To avenge the hedge fund’s role in the 2008 crisis, a group of Redditors teamed up to destroy Melvin Capital by buying into Gamestop stock where Melvin was short. Melvin had to close up shop this year. David’s group took down Goliath figuratively.
Melvin wasn’t the only one. Many other hedge funds have also been forced to close due to unabated losses in the market. Market volatility, very high risk and low investment due diligence made a perfect recipe for disaster. Hedge funds are in need of a new stimulus, as the recent economic downturn has intensified. Just like the 1980s, it’s time for new ideas!
What if the idea of taking positions based on short-term market movements is combined with strong risk management?
Additionally, if trends based on historical data and real-time sentiment analysis are added to this analysis, this can create a powerful tool. Some hedge funds, such as SecVolt, use quant-based analytics to generate high returns that are unaffected by market fluctuations.