Investing in hedge funds

 

UNDERSTANDING HEDGE FUNDS

Since the beginning of the twenty-first century, hedge funds have become increasingly popular in financial portfolios. Hedge funds are simply a fancy word for an investing partnership with more freedom to invest aggressively and in a broader range of financial goods than most mutual funds. It's the union of a professional fund manager (commonly referred to as the general partner) and investors (typically referred to as limited partners). They put their money into the fund as a group.

 

AIM

The market direction neutrality of most mutual funds is a recurring subject. Hedge fund management teams resemble traders more than traditional investors since they intend to profit whether the market rises or falls. Some mutual funds use these strategies more than others, and not all mutual funds actually hedge their positions.

 

BENEFITS OF HEDGE FUNDS

The goal of a hedge fund is to maximise investor profits while minimising risk. If this structure and objectives seem a lot like mutual fund objectives, that's because they are, but the parallels end there. Hedge funds are often thought to be more risky, aggressive, and exclusive than mutual funds. Limited partners fund the assets in a hedge fund, while the general partner administers the fund according to its strategy. Hedge funds get their moniker from the trading tactics that fund managers are allowed to utilise.

 

EXPERTISE IN FINANCIAL SERVICES

Our company's experts have a lot of experience in regulatory and financial advisory services. Our team of experts has in-depth understanding of domestic regulations as well as hands-on expertise with difficulties relevant to all of the fund sectors we work with. We've made agreements with top advisors who have already worked with regulators and can offer useful insight.

Our financial advisory services and advisors are focused on identifying opportunities and leveraging them to the customers' benefit through customised and innovative ways. The technique is based on complimentary elements such as industry/sector knowledge, multidimensional tools, and the ability to supply services both locally and worldwide.

Understanding the concept of asset/liability management

MEANING OF ASSET/LIABILITY MANAGEMENT

The concept of Asset/liability management means the use of assets and cash flows towards reduction of risks of a company or body corporate from losing money because of its inability to pay a liability within the stipulated period. Assets and liabilities that are well-managed can help one increase the rate and chance of profitability. This method is used to assess the risk associated with bank loan portfolios and pension plans. The economic worth of equity is also included.

 

CONCEPT OF ASSET/LIABILITY MANAGEMENT

Asset and liability management is a business strategy that helps firms deal with risks that arise from a mismatch between liabilities and assets. Changes in the economic landscape, such as changing interest rates or liquidity requirements, might cause these differences.

The main goal of a robust ALM framework is long-term stability and profitability. They achieve this by carefully controlling credit quality, liquidity requirements, and the availability of sufficient operational capital. Unlike the other available techniques of risk management, this concept is a collaborative approach that employs frameworks to examine and analyse the complete balance sheet of an organization. It aids in ensuring that assets are invested to their full potential and liabilities are regulated over time.

 

RISK MITIGATION EXAMPLE OF ALM

Despite the fact that ALM frameworks varies substantially amongst companies, they all involve the mitigation of a wide range of risks. Interest rate risk and liquidity risk are two of the most basic hazards addressed by ALM.

·         Interest Rate Risk - The dangers of changing interest rates and the impact of unstable interest rates on future cash flows.

Deposits and loans are two examples. Interest rates have an impact on both, therefore altering rates might result in asset and liability mismatches.

·         The ability of a financial organisation to liquidate assets is known as liquidity risk. Its financial situation will suffer if it is unable to do so.

·         Other Risks - ALM can also be used to manage currency risk and capital market risk.

 

Various sorts of enterprises, such as banks, financial institutions in India, non-bank finance companies in India, insurance companies, asset management companies, and even non-financial companies, employ Asset Liability Management to meet regulatory or prudential criteria and are benefitted by this approach.

Why invest in hedge funds?

Hedge funds are a type of mutual funds that are unregistered private instruments partnerships that trade in different types of instruments like securities, non-securities, derivatives, etc. Hedge funds are not subject to the same regulatory requirements that mutual funds need to fulfill. These investments are not regulated by the Securities and Exchange Board of India (SEBI). All other types of mutual funds are required to follow such regulations.

Hedge funds are pooled money from individual investors, high net worth individuals (HNIs), banks, corporations, etc. that are collectively invested in different securities in the national and international markets. There are different strategies using which these funds are invested, and each of these strategies differ. Hedge fund managers invest their client’s funds based on their specific requirements.

In event driven hedge funds, the investors take advantage of the price movements in the market, for example, when a corporation is involved in a merger or acquisition, etc. Another strategy is long/short selling in which the funds of the portfolio are equally distributed among long and short positions in the market. This way, the portfolio has a better risk-return policy, as the risk is mitigated in such a way that even when the market is not performing well, the portfolio performs well. 

There are different types of hedge mutual funds like domestic, off shore, and fund of funds. Domestic hedge funds are those investments that are made within the country and are subject to taxation by the Government of India. Offshore funds are invested in countries outside the home country, preferably to reap the benefits of low taxation in such countries. Fund of funds are an entirely different type of funds that are invested in other hedge funds, instead of the securities. Hedge funds carry high risk as it does not fall under the regulation of SEBI, but it also earns high returns as it is a pooled investment vehicle. This type of investment is a highly suitable credit solution for high-net-worth individuals (HNIs), banks, corporations, etc.