How do you invest in Hedge Funds?

When we talk about hedge funds, we know that they will either maximize your returns exponentially while also leaving you exposed to risk, volatility and illiquidity. If you're new to this or have little to no experience, it is highly recommended that you employ financial advisory services to manage your funds.

 

A little less known fact about hedge funds is that they aren’t all necessarily registered with the Securities and Exchange Board of India (SEBI). They don’t have to disclose their NAVs at the end of the day either. This is the only investment form with an exception to these regulatory requirements. To start with, your minimum ticket value is 1 Crore INR.

 

Keep in mind that the fund manager that you employ would have complete discretion when it comes to the composition of your portfolio, deciding the investment strategy and the amount of leverage. Highly skilled financial advisory services that you seek to employ should be able to quickly adjust your portfolio based on rapidly changing market conditions.

 

Speaking of strategy, these are the most commonly used strategies to invest in hedge funds:

●        Event-driven:
In short, some corporate events lead to price movements in the market. These situations cause fund managers to take long and short positions in different types of securities. Merger arbitrage and distressed asset funds are two examples.

●        Long and Short Selling:
Short-selling refers to the selling of securities without buying them, but with the intention of buying them at a predetermined date at a predicted price in order to make gains.

●        Market-driven:
Those that provide such financial advisory services must stay on top of global market trends to exploit the situation and make swift decisions based on changes in currencies, interest rates, commodities and equities.

 

Understanding the nitty-gritty of hedge funds is important before you decide to invest in them. See if it aligns with your goals, and weigh out the entire complex structure before you proceed.

What is Asset Liability Management (ALM) and what are the risks it addresses?

 Asset and liability management also known as ALM banking or ALM finance by the financial companies in India, manages the size, quantities and totals of balance sheet items. But what are assets and liabilities?

Assets are the items or value that a company or an individual holds which can be liquidated at any point of time. Liabilities on the other hand are something you owe to either your creditors, vendors, suppliers or other stakeholders, and they decrease the value of your company.

Asset and liability management strategies are used by financial companies in India and over the world to solve three major risks – Credit risk, liquidity risk, interest rate risk.

Credit risk – These risks occur when we don’t get paid as much as we expected to. With loans contributing to be the largest source of credit risks for most banks and financial companies in India, cash management, FX, credit derivatives, unfunded loan commitments, letters of credit and lines of credit are some other contributors to disturbing the balance sheet of an institute. They use the ALM model to take a consistent approach to project the impact of credit risks on cashflow and capital under various circumstances to lower their exposure to this risk.

Liquidity risk – Liquidity is the ability of your assets and valuables to convert into cash easily.  For example: Keeping your house as a collateral for an overseas education loan. Asset and liability management helps banks and other institutions to identify, measure and monitor liquidity risks by taking into consideration the future projections and adverse scenarios to warrant themselves against this risk.

Interest rate risk – The most strongly associated risk with ALM is the risk that has resulted because of volatility in the interest rates. Financial institutions quantify their exposure to this risk by running measurement tools and techniques along and create their own ALM model, outsource it or use a hybrid approach to insure themselves against interest rate volatility.

An introduction to Long Only Absolute Return Funds and what they bring to the table

Financial institutions with their portfolios seeking diversification are opting long only funds over hedge funds in an actively managed alternative funds space to generate returns. Ever since the global market crisis, investment banking companies, financial institutions, banks and independent investors have been looking for ways to increase their profits by diversifying their investments and reducing their exposure to market risks. From traditional mutual funds to alternative investment funds, no stone has been left unturned in an effort to preserve capital and maintain positive returns. Long only funds are the newest entrants in the alternative funds ecosystem helping investors get a bang for their buck.

This fund takes only long positions on undervalued securities and reduces exposure to the risk of market drawdowns by holding basic asset class instruments. An alternative proven to deliver results, investment banking companies and other financial investors use this strategy to generate real returns despite the market condition.

Why focus on long only absolute return funds over traditional mutual funds?

Highly beneficial – Fund management companies are rewarded generously since long only funds take an incentive-based approach to charge management fees and performance fees, which are around 2% and 20% respectively. The fund’s ability to generate high profits ensures that managers get a rewarding experience.

More flexible – In contrast to the dull and rigid indexed assets, these funds provide more agility in terms of allocating assets, selecting securities, the level of exposure, and the use of leverage and allow investment opportunities in limitless amalgamations across the instruments from the basic asset class.

More consistent – They protect against the potential downside caused by depression in the markets by diversifying across a spectrum of securities and keeps generating consistent returns from the investments.

 

Investment banking companies, institutions and other investors have always been safeguarding their portfolios by constantly re-evaluating their strategies and long only funds with its diversified approach is the future of investments for anyone looking to generate consistent returns.

How is investment banking different from wealth management and what are some of the key differences?

The world of finance is ever-expanding. With it, the range of services organisations and individuals need have also become extremely specific. The core purpose of both investment banking firms in India and wealth management firms is to help their clients manage their assets and/or wealth. However, asset management is the only common ground between these two varied services. Let’s look deeper at each of them to understand what they offer.

Investment Banking:

Investment banking firms in India and over the world usually deal with corporates, governments and institutional investors. The range of services an investment banking firm provides are:

Advising about mergers & acquisitions – Huge corporations and institutions are usually on the lookout to acquire new businesses to increase their portfolio. Investment banks act as a negotiator between the two companies and helps their client acquire or sell a business and help with restructuring the newly acquired business.

Underwriting – When a corporate or an institution wants to raise money by selling bonds, issuing shares or raising an IPO, investment banking firms raise money on behalf of the organisation.

Researching investment opportunities – Investment banking firms in India study, analyse, report and recommend new investment opportunities for their clients and help them earn profits.

Trading – Investment banking firms in India usually have a sales and trading team which helps their client manage money with either equity or bond transactions or both.

Commercial & retail banking – Although not all investment banks have the license to offer banking services, those who have acquired a license can offer services such as deposit placement, accounts for savings, cheque, mortgage and loan services, etc.

 

Investment banking VS Wealth management

 In the financial sector the most successful and well known field is investment banking and wealth management.Though there are several junctions between them, they are completely different fields. Let’s see what makes investment banking and wealth management a separate line of work.

 

Main differences between Investment banking and Wealth management

Investment banking is where bankers provide services through their expertise to an entity/company rather than serving an individual. Whereas wealth managers provide their expertise to a person whose net worth is higher.

High-net-worth individuals who are clients of wealth management companies are usually business owners. They may wish to obtain advice on business restructuring or potential mergers and acquisitions from the investment banking field, and may wish to obtain investment banking products. IPO or bond issuance

 

Origin of Investment banking in India

Investment banking firms in India were first established in the 19th century. Back then, only non-indian banks were overpowered across the country. In the 1970s, India's state-owned banks entered the company and became the first financial institution in India to provide commercial banking services by establishing commercial banks and ICICI securities offices.

By the time of 1980, financial banking, commercial banking and investment banking firms in india had grown rapidly.

One of the top most investment banking firms india is Avendus Capital founded in the year 1999. It is an investment banking company that originated in India, specializing in providing various services in the fields of asset management, investment banking, wealth management, and private equity.

 

Wealth management and its role:

Wealth management only refers to all aspects of fund management. Wealth management companies make money by charging fees for the various services they provide. In the investment field, customers usually sell managed account services, that is, discretionary investment accounts where the company's investment professionals conduct transactions on behalf of the customer.

 

Conclusion:

Almost all of the larger banks have investment banking and wealth management (private banking) departments, and generally retail banks and asset management companies, to take advantage of cross-selling opportunities in their customer base.

 Large asset management companies and wealth management companies have the advantages of efficient execution and free / cheap market research. Investment banks benefit from direct contact with major clients. Retail clients start a small business, they get rich and they want a wealth manager, they want to open up the capital markets, they need an investment bank.