HEDGE FUNDS :
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.
The term can also be defined by considering the characteristics most commonly associated with hedge funds.
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;
– employ as assortment of trading techniques and instruments, often including short-selling, derivatives and leverage;
– pay performance fees to their managers; and
– have an investor base comprising wealthy individuals and institutions and relatively high minimum investment limit
Hedge Fund and Other Pooled Investment Vehicles
Hedge funds are sometimes called as ‘rich man’s mutual fund’. In addition, other unregistered investment pools,
such as venture capital funds, private equity funds and commodity pools, are sometimes referred to as hedge funds. Although all of these investment vehicles are similar in that they accept investors’ money and generally invest it on a collective basis, they also have characteristics that distinguish them from hedge funds.
Mutual Fund or Registered Investment Companies
In many ways, hedge funds are similar to mutual funds. Both entities issue units or securities to investors, hold pools of securities to diversify investment, have professional asset manager and may, at times, have similar investment strategies. At the same time, they also differ in a number of ways. Mutual funds are registered with securities markets regulator and are subject to the provisions of the relevant regulations such as, offer/issue of units/securities, disclosure and reporting requirement, valuation for the purpose of computation of NAV, conflict of interest issue and limit leverage. Hedge funds are not required to be registered and therefore, are not subject to similar regulatory provisions.
Private Equity Fund
A private equity fund, like a hedge fund, is an unregistered investment vehicle in which investors pool money to
invest. Private equity funds concentrate their investments in unregistered (and typically illiquid) securities. Like
hedge funds, private equity funds also rely on the exemption from registration of the offer and sale of their securities. The investors in private equity funds and hedge funds typically include high net worth individuals and families, pension funds, endowments, banks and insurance companies. Private equity funds, however, differ from hedge funds in terms of the manner in which contribution to the investment pool is made by the investors. Private equity investors typically commit to invest a certain amount of money with the fund over the life of the fund, and make their contributions in response to “capital calls” from the fund’s general partner. Private equity funds are long term investments, provide for liquidation at the end of the term specified in the fund’s governing documents and offer little, if any, opportunities for investors to redeem their investments. A private equity fund may distribute cash to its investors when it sells its portfolio investment, or it may distribute the securities of a portfolio company.
Venture Capital Fund
Venture capital pools are similar to hedge funds or private equity; they attract the same class of investors.Venture capital funds, however, invest in the start-up or early stages of a company. Unlike hedge fund advisors, general partners of venture capital funds often play an active role in the companies in which the funds invest. In contrast to a hedge fund, which may hold an investment in a portfolio security for an indefinite period based on market events and conditions, a venture capital fund typically seeks to liquidate its investment once the value of the company increases above the value of the investments.
Commodity Pool :
Commodity pools are investment rusts, syndicates or similar enterprises that are operated for the purpose of
trading commodity futures. The investment concentration in commodity futures distinguishes commodity pools
from hedge funds.