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WHAT IS HEDGE FUND ?
Hedge fund is a private investment partnership and funds pool that uses varied and complex proprietary strategies and invests or trades in complex products, including listed and unlisted derivatives.
DESCRIPTION
Hedge fund investors typically include high net worth individuals (HNIs) and families, endowments and pension funds, insurance companies, and banks. These funds work either as private investment partnerships or offshore investment corporations. They are not required to be registered with the securities markets regulator and are not subject to the reporting requirements, including periodic disclosure of NAVs.
How does a hedge fund work?
Hedge Fund Structure
The main structure of a hedge fund rests on the following basic components:
They are typically only available to qualified or "accredited" investors( who have annual income at least 2 crore and net worth at least 7.50 crore).
They have a wide spread of investments (to include stocks, bonds and mutual funds, but can also invest in Real estate ,food, currency, art, or whatever the fund's goals can encompass).
They frequently leverage other funds like borrowed money to attempt to increase returns (which can increase risk but also increase returns).
They have a "2 and 20" fee structure, where an expense ratio and a performance
fee are charged
What is a '2 and 20'?
Most hedge funds operate on a "2 and 20" manager compensation scheme, which gives the hedge fund manager 2% of the assets and an incentive fee of 20% of the profit every year. However, this structure has widely been criticized given that even if the hedge fund loses money that year on the profits, the fund manager still makes a cozy amount from that 2% of the invested assets.
Features of hedge fund
features
Accredited Investors: An ordinary investor cannot invest in hedge funds. Only qualified or accredited investors like banks, insurance companies and even high net worth individuals are allowed to invest in such funds.
Wide Investment Latitude: The hedge funds cover almost all kinds of asset classes, including stocks, bonds, real estate, currencies, equities, derivatives, etc.
Uses Leverage: The funds which are invested as hedge funds are usually the borrowed
sum in the hands of the fund manager.
Risk Factor: Some of the hedge funds are exposed to a high risk which may lead to huge losses. The lock-in period is comparatively very high regarding other investment options.
Features
Tax Obligation: The hedge fund is not exempted from tax and is taxable on the grounds
of the level of investment. This tax will not be borne by the unitholders.
No regulations – these funds are not registered and do not lie under the regulations of the securities market regulators.
Fee Structure: The fees of hedge fund managers are ‘Two and Twenty’, i.e. 2% is the fixed fees, whereas the manager takes 20% on the profit earned. This fee structure is quite high as compared to other investment options.
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