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Trading Hedge Funds or Chasing the Hedgehog?

Hedge Funds have a long history. Alfred Winslow Jones launched the first hedge fund in 1949. It was long after, during the 1960’s when an article in one of the U.S best financial magazine brought to light an investment that was better than any investment on market at that time. The so called Hedge Fund. By 1968, there were some 140 hedge funds in operation.  Famed hedge fund manager Mario Gabelli wrote in 2002: "Today, if asked to define a hedge fund, I suspect most folks would characterize it as a highly speculative vehicle for unwitting fat cats and careless financial institutions to lose their shirts." So, what is it really a Hedge Fund and how you can trade on it?Trading Hedge Funds The definition for hedge fund on Wikipeida is “A hedge fund is an investment fund that can undertake a wider range of investment and trading activities than other funds, but which is only open for investment from particular types of investors specified by regulators.” In more simplified words, these are companies related to rich people or who have access to pension funds. Through these funds, hedge funds can invest in different areas. Mostly they trade normal shares on the stock exchanges. It must be mentioned that most hedge funds are open-ended, which means that investors have the ability to come in and out of a hedge fund regularly. The value of an investment in a hedge fund is calculated as a share of the fund's net asset value, which means that it increases and decreases in the value of the fund's assets and this is directly reflected in the amount an investor can later withdraw.

Advantages of Hedge Fund Investing

The investment manager gets paid a huge performance fee for successfully turning large profits on the fund, therefore he is highly motivated to make the investment flourish. Hedge funds bank on the prosperity of only one investment and are not overly diversified investments. Aggressive investment strategies such as short-selling or using borrowed money to buy more assets (leverage buying) can legally be utilized. Huge gains in millions are the potential reward for investing in hedge funds.

Disadvantages of Hedge Fund Investing

Only the wealthiest individuals can participate in hedge funds. Hedge funds are extremely risky and millions of dollars can be lost in the blink of an eye. The performance fee for the investment manager may encourage them to take bigger risks with your money. There are very few government regulations overseeing hedge fund investments (Source: Bankingrates.com).

Risk mitigation and Hedge Funds in India

As all investments, hedge funds aim at increasing investment return. Sometimes, hedge fund managers invest their own money in order to focus on the fund as well as to share the same emotion and interest as the rest of the investors. As always investment managers are paid a fee. Recent data shows that as of 2009, hedge funds represented 1.1% of the total funds and assets held by financial institutions.As of April 2012, the estimated size of the global hedge fund industry was US$2.13 trillion. Chasing the Hedgehog

According to a recent report published by Eurekahedge, in 2014, the average Indian hedge fund was up 39.36%, outperforming underlying markets by almost 10%. Managers running long/short equity strategies emerged as the clear winner posting gains of 54.83% - their best performance in the last eight years.

In India, hedge funds have returned well compared to international markets. Looking at some data from various sources, we can see that hedge funds in India have outperformed other emerging markets consistently by about 10% return. There were obviously bumpy quarters along the way but for the last 8 years, barring 2011, Indian hedge funds have performed well. Some of the biggest hedge funds in India are: HFG India Continuum Fund, Avatar Investment Management, India Deep Value Fund, Fair value, etc

How to invest in Hedge Funds?

As mentioned above, usually hedge funds are open – ended. This means that funds accepting new investors are open on a monthly or quarterly basis. The normal way is to approach an investment company which specializes in hedge funds. Usually these companies use consultants or invest in funds of funds. A funds of funds means that the investment company or the portfolio manager spreads its group of investments to different hedge funds, using different strategies and asset sectors which can provide a more steady long-term investment return than that of the individual hedge funds. This way it is especially functional given the wide spectrum of hedge fund strategies and styles that exist. As mentioned above, although hedge funds got their name in the early 1960s with managers who both bought shares and sold them short, today the term refers in essence to any fund using different investment styles, some of which may not even hedge risk!In conclusion, hedge funds appear to be increasing in numbers during the past few years. It is estimated that around four to five thousand hedge funds exist around the world. Their value combined exceeding 200 billion dollars. Only hearing about these numbers makes them interesting for any potential investor.

 

Last update on: 21st April, 2015

Gaurav Wadekar (have 2 posts in total)
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