How and Why Should One Invest in Hedge Funds?

Even with the investment banking industry India booming, hedge funds are one form of investment that are looked upon as too risky. Before you form any opinions, it is extremely necessary to understand exactly what they are, how they function and who should invest in them.

Hedge funds are private investments made with pooled funds that aim towards earning a continuous return for the investor. These generally involve massive funds and a lock down period of at least one year. While investing in hedge funds, one can pool money into the national as well as international markets. However, since they involve investment of a large sum of money, they are accessible to only a certain set of accredited investors.

Hedge funds are generally created for a specific market opportunity and therefore require the use of specific investment banking strategies. These strategies are formulated keeping in mind the objective of investment, market attractiveness, and the financial environment. They directly help in determining the amount of risk involved in investing. While some strategies are not as risky, others are. Therefore, it is extremely crucial to derive them carefully.

Unlike mutual funds, not everyone can invest in hedge funds. There is a specific guideline that one must fulfil in order to be considered eligible for investing in them. Firstly, it is mandatory that one has a net worth of $1 million or more, while having an income exceeding $200,000 for two consecutive years. Further, unlike mutual funds, investment in hedge funds is not limited to stocks and bonds. One can choose to invest in bonds, stocks, land, currencies, etc., both domestically and overseas.

Once you have decided that you are willing to invest in hedge funds, it is advised that you go through a detailed assessment process. This will help you find the hedge fund that suits you well and at the same time offers the least possible amount of risk. The most important tool that comes in handy while assessing hedge funds is the World Government Bond Index (WGBI).  It allows you to compare annual return rates and calculate deviations. Further, other aspects that can affect your choice are the size of the firm that you are choosing to invest in, its track record, the minimum investment required and redemption terms of the fund all together.

Considering that hedge funds give higher returns and are bound by fewer regulations than mutual funds, asset management companies in India believe that the country has a lot of potential of getting international funding for domestic funds. Increasing purchasing power and the Indian instinct to save has resulted in a booming hedge fund market. Early entrants of the market have earned substantial revenue and have predicted that the market would only grow.

Investing in hedge funds has its pros and cons. It is important to not get misguided by bias and invest in plans that work for you and your business.