HEDGE FUNDS

Explained in Simple Terms

What are Hedge Funds?
Hedge funds are investment funds that pool
money from rich or high-net-worth investors and
use various strategies to generate returns.

In most simple terms, you can call it a "Mutual

Fund of Rich People but bit riskier".
Unlike traditional mutual funds, hedge funds have
fewer regulations and greater flexibility in their
investment choices

These funds are managed by professional investment

managers who aim to achieve higher-than-average
returns by taking advantage of market opportunities.
Characteristics of Hedge
Funds:
Hedge funds are open only to accredited or
qualified investors who meet specific criteria
related to net worth, income, or expertise.

They invest in a wide range of financial

instruments, including stocks, derivatives, bonds,
commodities, and currencies.

Hedge funds are actively

managed, meaning the fund
manager has significant
discretion in making
investment decisions.
Hedge fund managers are often paid on the basis
of the performance of the fund, typically through
a performance fee.

Hedge funds are subject to fewer regulations than

other investment vehicles like mutual funds.

Hedge funds often have lock-up periods, during

which investors are unable to withdraw their
funds.
Types of Hedge Funds
1) Long/Short Equity:
These funds take both long (buy) and short (sell)
positions in stocks and aim to generate returns by
exploiting both upward and downward
movements in equity markets.

2) Global Macro:
Global macro funds focus on macroeconomic
trends and invest in a wide range of asset classes,
including currencies, commodities, stocks, and
bonds, based on their views of global
macroeconomic conditions.
3) Event-Driven:
Event-driven hedge funds seek to capitalize on
specific events such as mergers, acquisitions,
bankruptcies, or other corporate actions.

4) Relative Value:
Relative value hedge funds seek to exploit pricing
inefficiencies or valuation discrepancies between
related securities.

5) Fund of funds:
This is a hedge fund that invests in a basket of
other hedge funds.
Potential Risks Involved:
Hedge funds often impose lock-up periods during
which investors cannot withdraw their money.

This illiquidity limits your access to funds during

times of financial need.

Hedge funds are private entities with relatively

less public disclosure requirements. This
leads to a lack of transparency.

Hedge fund returns can

vary significantly due
to their unique strategies
and exposure to
different market conditions.
Benefits of Investing in
Hedge Funds
Hedge funds diversify investment portfolios by
employing alternative strategies and investing
across various asset classes.

Hedge funds aim to generate substantial

returns by utilizing unique investment
strategies and taking advantage of the market
inefficiencies.

Hedge funds have the

flexibility to adapt their
strategies to changing
market conditions.
Hedge Fund Vs. Mutual Fund

Features Hedge Funds Mutual Funds

Investor Accredited investors, Retail and institutional

Eligibility HNIs Banks. investors

Investment
Diverse strategies Traditional strategies
Strategy

Leverage/
Allowed Not Allowed
Short Selling

Higher returns, Comparatively low risk

Performance
higher risk & low returns

Transparency Less transparent More transparent

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Research Credits
Harshal Jamdhade