INTRODUCTION

Hedge funds, including fund of funds are unregistered private

investment partnerships, funds or pools that may invest and trade in
many different markets, strategies and instruments (including
securities, non-securities and derivatives) and are NOT subject to the
same regulatory requirements as mutual funds, including mutual fund
requirements to provide certain periodic and standardized pricing and
valuation information to investors. Usually, hedge funds:
Are organized as private investment partnerships or offshore
investment corporations;
Use a wide variety of trading strategies involving position-taking in a
range of markets;
Pay performance fees to their managers; and
Have an investor base comprising wealthy individuals and
institutions and relatively high minimum investment limit.
 Domestic and Offshore Hedge Fund
 Domestic hedge funds are usually organized (in USA) as
limited partnerships to accommodate investors that are subject
to U.S. income taxation. Hedge funds may also take the form
of limited liability companies (LLC) or business trusts.

 Offshore funds generally attract investments of US. tax

exempt entities, such as pension funds, charitable trusts,
foundations and endowments, as well as non-U.S. residents.
U.S. tax-exempt investors favour investments in offshore
hedge funds because they may be subject to taxation if they
invest in domestic limited partnership hedge funds. Offshore
funds are typically more liquid than domestic funds. Offshore
hedge funds are valued as NAV (net asset value), not as
account balances, as domestic funds are valued.
 Different strategies a hedge fund uses to invest
their money
 Event Driven:. Hedge funds that use an event driven strategy
generally invest in companies that are expecting a large impact on
the price of the stock over a short period of time.

 Global macro – funds that take long and short positions in major
financial markets based on views influenced by economic trends
and events. Macro strategies do not focus on individual companies
but rather focus primarily on profiting from shifts in global trends

 Equity Market neutral – funds where the manager attempts to

minimize (or significantly reduce) market risk. This approach
minimizes inherent securities market risks by combining an array
of long and short sales within the same industry, market, country.
 Benefits of Hedge Funds

Hedge funds can provide benefits to financial markets by contributing to

market efficiency and enhance liquidity. Most hedge funds aims at
reducing volatility and risk while offering high returns under different
market conditions.
 Positive return- many hedge fund strategies have the ability to generate
positive return in both rising and falling equity and bond market.
 Ideal investment- hedge funds provide an ideal long term investment
solution, eliminating the need to correctly time entry and exit from market
 Better diversification- Hedge fund can also serve as an important risk
management tool for investors by providing valuable portfolio
diversification. Hedge fund strategies are typically designed to protect
investment principal.
 Wide choice – it provide investors with a wide choice of hedge fund
strategies to meet their investment objective.
 Market Benefits of Hedge Funds:

 Hedge funds can provide benefits to financial markets by

contributing to market efficiency and enhance liquidity.

 Hedge funds also provide liquidity to the capital markets by

participating in the market.

 Hedge funds play an important role in a financial system

where various risks are distributed across a variety of
innovative financial instruments.
 Fees
A hedge fund manager will typically receive both a
management fee and a performance fee (also known as an
incentive fee) from the fund. A typical manager may charge
fees of "2 and 20", which refers to a management fee of 2% of
the fund's net asset value each year and a performance fee of
20% of the fund's profit.
 Management fees
As with other investment funds, the management fee is
calculated as a percentage of the fund's net asset value.
Management fees typically range from 1% to 4% per annum,
with 2% being the standard figure. Management fees are
usually expressed as an annual percentage but calculated and
paid monthly or quarterly.
Performance fees
Performance fees (or "incentive fees") are one of the defining
characteristics of hedge funds. The manager's performance fee
is calculated as a percentage of the fund's profits, usually
counting both realized and unrealized profits. In the business
models of most managers, the performance fee is largely
available for staff bonuses and so can be extremely lucrative
for managers who perform well. Several publications publish
annual estimates of the earnings of top hedge fund managers.
Typically, hedge funds charge 20% of returns as a performance
fee. However, the range is wide with highly regarded
managers charging higher fees. For example Steven Cohen's
SAC Capital Partners charges a 35-50% performance fee,
while Jim Simons' Medallion Fund charged a 45%
performance fee.
 Hurdle rates
Some managers specify a hurdle rate, signifying that they will not
charge a performance fee until the fund's annualized performance
exceeds a benchmark rate, such as T-bill yield, LIBOR or a fixed
percentage. This links performance fees to the ability of the manager to
provide a higher return than an alternative, usually lower risk,
investment.

Withdrawal/redemption fees
Some funds charge investors a redemption fee (or "withdrawal fee" or
"surrender charge") if they withdraw money from the fund. A
redemption fee is often charged only during a specified period of time
(typically one year) following the date of investment, or only to
withdrawals representing a specified portion of an investment. The
purpose of the fee is to discourage short-term investment in the fund,
thereby reducing turnover and allowing the use of more complex,
illiquid or long-term strategies.
 CHARACTERSTICS OF HEDGE FUND

Short selling- due to the nature of short selling, the losses that can
be incurred on a losing bet are, in theory, limitless, unless the short
position directly hedges a corresponding long position. Therefore,
where a hedge fund uses short selling as an investment strategy
rather than as a hedging strategy, it can suffer very high losses if
the market turns against it. Ordinary funds very rarely use short
selling in this way.

Appetite for risk- hedge funds are more likely than other types of
funds to take on underlying investments that carry high degrees of
risk, such as high yield bonds, distressed securities, and
collateralized debt obligations based on sub-prime mortgages.
 
 Lack of transparency- hedge funds are secretive entities with
few public disclosure requirements. It can, therefore, be
difficult for an investor to assess trading strategies,
diversification of the portfolio, and other factors relevant to an
investment decision.

 Lack of regulation- hedge fund managers are, in some

jurisdictions, not subject to as much oversight from financial
regulators as regulated funds, and therefore some may carry
undisclosed structural risks.
 
 Hedge fund structure
The fund itself has no employees and no assets other than its
investment portfolio and cash. The portfolio is managed by
the investment manager, which is the actual business and has
employees. As well as the investment manager, the functions
of a hedge fund are delegated to a number of other service
providers. The most common service providers are:
 Prime broker – prime brokerage services include lending
money, acting as counterparty to derivative contracts,
lending securities for the purpose of short selling, trade
execution, clearing and settlement. Many prime brokers also
provide custody services. Prime brokers are typically parts of
large investment banks.
 
 Administrator – the administrator typically deals with the
issue and redemption of interests and shares, calculates the
net asset value of the fund, and performs related back office
functions. In some funds, particularly in the U.S., some of
these functions are performed by the investment manager, a
practice that gives rise to a potential conflict of interest
inherent in having the investment manager both determine
the NAV and benefit from its increase through performance
fees. Outside of the U.S., regulations often require this role
to be taken by a third party.
 Distributor - the distributor is responsible for marketing
the fund to potential investors. Frequently, this role is taken
by the investment manager.
 Highlights of Regulatory Review
 Hedge funds are a growing segment of asset management industry and
increasingly becoming popular not only with high net worth
individual investors but also with institutional investors including
university funds, pension funds, insurance and endowments.
 
 Hedge funds, are sometimes perceived to be speculative and volatile.
However, not all funds exhibit such characteristics.
 
 Hedge funds themselves are not registered in most of the developed
markets but investment managers/advisors managing hedge funds
could be registered as investment advisors under the relevant
regulations. However, the registration of the investment advisors does
not necessarily involve substantive supervision over the funds
operations.
 Some jurisdictions are gradually moving towards allowing the
marketing of hedge fund and fund of funds products to retail
investors. Those jurisdictions have simultaneously imposed
disclosure requirements to ensure that investors understand the
complexity and associated risk of investing in hedge funds.

 Hedge funds in search of high returns are also investing in

emerging markets. Realizing the growing importance of hedge
funds, several emerging market regulators have opened their
markets to offshore hedge funds by providing authorization as
registered foreign investors.
 
 All hedge funds though are not regulated like mutual funds, they
are nevertheless subject to market abuse laws and anti-money
laundering procedures.
 Hedge Funds in India
 With the notification of SEBI (Mutual Fund) Regulations
1993, the asset management business under private sector took
its root in India. In the same year SEBI, also notified
Regulations and Rules governing Portfolio Managers who
pursuant to a contract or arrangement with clients, advise
clients or undertake the management of portfolio of securities
or funds of the client.
 Recently, RBI through liberalized remittance scheme, allowed
resident individuals to remit upto US $ 25,000 per year for any
current or capital account transaction. The liberalized scheme
will allow Indian individual investors to explore the possibility
of investing in offshore financial products.
 LIST OF HEDGE FUNDS IN INDIA

• HFG India continuum fund

• Avtaar investment Management
• India Investment Advisors
• Fair Value
• Indea Capital Pte. Ltd
• India capital fund
• Monsoon capital equity value fund
• Karma capital management, LLC
• Atyant capital
• Atlantis India opportunities fund