A hedge fund is a private investment or a limited partnership fund that comprises high-net-worth and skilled investors whose funds are managed by a hedge fund manager. The fund manager tends to apply the best hedge fund strategies, including leveraging non-traditional assets, to earn above-average returns.
In 2012, markets regulator the Securities and Exchange Board of India (SEBI) unveiled hedge funds as part of the SEBI Alternative Investment Funds Regulations. Hedge fund companies are known to deploy different trading techniques considering the multiple assets and securities they invest in.
It is quite common for hedge funds to buy and/or short publicly traded stocks. However, they can also make money by investing in alternative assets, such as fine art, real estate, currencies, crypto, and patents, to list a few.
The three main types of hedge funds are: Offshore hedge funds, domestic hedge funds and fund of funds (FoFs). It is important to note that hedge funds have a high-volatile nature.
Generally, hedge funds operate with more leeway than mutual funds or exchange-traded funds (ETFs). Therefore, fund managers are known to explore various investment avenues.
On the other hand, mutual funds are a more accessible and common form of investment vehicle for the general public. Mutual funds tend to pool money from multiple investors to buy a diversified portfolio of stocks, bonds, or other securities. Typically, these are managed by professional portfolio managers who make investment decisions based on the fund’s stated objectives.
Generally, mutual funds tend to invest in a wide range of securities, spreading out the risk. As a result, the poor performance of a few securities will not significantly impact the entire investment portfolio.
Mutual funds are known to offer daily liquidity, allowing investors to buy or sell fund units at their current net asset value (NAV). Considering that mutual funds have lower minimum investment requirements, they are generally suitable for all types of investors.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.