'Money' has been to humanity what mitochondria are to a cell, a ‘powerhouse.’ Humanity has evolved around money; we have moved places, fought wars, and become civilized and globalized due to our motivation for money. We all strive for the 'biblical money printing machine,' a source for unlimited money and subsequent power. But what if there are a selected few who have access to this 'mythical machine,' not the Mafia or the Federal bank, but rather a set of entities that have been formed in the last 70 years, which have completely transformed the world of Finance: Hedge Funds.
What's Hedge Fund?
In Securities and Exchange Board of India (Sebi’s) words, “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.”
In simple terms, Hedge Funds pool money from high-net-worth individuals and large companies to generate higher return and diversify risk. The funds are managed by professional fund managers who follow a wide range of strategies to invest in traditional or non-traditional assets, to earn above-average investment returns.
The investments are often considered high-risk and usually done by high net worth individuals.
What is the typical hedge fund fee structure?
Hedge funds charge an asset management fee based on the fund’s net assets, along with a performance-based fee. The asset management fee is generally between 1 per cent and 2 per cent of the fund’s net assets, and is charged on a monthly or quarterly basis. The performance fee can range between 10 per cent and 15 per cent of each investor’s net profits for each calendar year. The fee may go up 20 per cent.
So, if an investment of Rs 10 lakh increases to Rs 12 lakh in one year, Rs 40,000 is the fee owed to the fund.
Who can invest in Hedge Fund?
Only qualified or accredited investors can invest in hedge funds. They are mainly high net worth individuals (HNIs). The minimum size for investing in these funds is Rs 1 crore per investor and an entire fund needs to have a minimum corpus of Rs 20 crore.
History and understanding about hedge funds
The brainchild of A.W Jones, the first Hedge Fund, came about in 1952. Hedge Funds were primarily built around two main factors: proprietary investment strategies and access to money. As more people entered the market, they formed their own strategies and, subsequently, their own funds. With roaring economic success in the early 60s, money flowed in too. But the success was short-lived; with the economic downturn at the turn of the decade, hedge funds caught in the fire as well. By 1975, assets under the Management of Hedge funds declined by 70%. They needed new ideas, and a mathematician bought one.
Jim Simmons, with his army of math professors, revolutionized the Hedge Fund industry. He understood that the rest of the Hedge Funds are making a futile attempt to predict the market movements in the long term; it is not possible with the dangers of market crashes always present. Instead, market movements could be understood for a very short time period, and this is where Renaissance Technology would make their money. Hedge Funds have only strengthened from there.
From unabated speculation by George Soros in the 1990s to the role of Hedge Funds in the 2008 Financial crisis, the role of Hedge Funds came under the serious gaze. So much so that a bunch of Redditors collaborated to destroy Melvin Capital as revenge for the role of Hedge Fund in the 2008 crisis by buying into Gamestop Stock, which Melvin was short on. Melvin had to close the shop this year. A bunch of Davids brought down the proverbial Goliath.
Melvin was not the only one. A bunch of other Hedge Funds, too, were forced to close due to unabated losses in the market. Market drawdowns, very high risk, and low due diligence for investments made a perfect recipe for disaster. It has increasingly been believed with the recession starting in the short-term that Hedge Funds need new inspiration. Like in the 1980s, the time is ripe for the rise of new ideas!
What if idea of taking positions based on short-term market movements is combined with robust risk management?
Further if trends based on historical data and real-time sentiment analysis is added to this analytics, this can create a powerful tool. Some hedge funds like Secvolt use Quant-based analytics to generate higher returns that are unaffected with the market fluctuations.
FAQs
A hedge fund is a limited partnership of private investors whose money is pooled and managed by professional fund managers. These managers use a wide range of strategies, including leverage (borrowed money) and the trading of non-traditional assets, to earn above-average investment returns.
Why do rich people invest in hedge funds? ›
Risk Management
Hedge funds were developed, in part, to help investors manage investment risk. Their market-neutral, or balanced, approach to investing helps seek out positive returns by investing in varied instruments over long- and short-term periods.
Do hedge funds actually beat the market? ›
There are over 3,400 hedge funds in the U.S. It's a big business. But almost none of them consistently outperform the broader stock market. Investing in the S&P 500 is the most straightforward path to stock market riches.
Who owns hedge funds? ›
Hedge fund management firms are often owned by their portfolio managers, who are therefore entitled to any profits that the business makes. As management fees are intended to cover the firm's operating costs, performance fees (and any excess management fees) are generally distributed to the firm's owners as profits.
Do people in hedge funds make a lot of money? ›
The top individual Portfolio Managers can earn hundreds of millions or billions each year. Hedge funds offer a much higher pay ceiling than investment banking, (sometimes) better hours and work/life balance, and the chance to do more interesting work.
What is hedge fund in simple words? ›
A hedge fund is a limited partnership of private investors whose money is pooled and managed by professional fund managers. These managers use a wide range of strategies, including leverage (borrowed money) and the trading of non-traditional assets, to earn above-average investment returns.
What is the wealthiest hedge fund? ›
What are the disadvantages of a hedge fund? ›
The biggest disadvantage is cost because these funds create a double-fee structure. Typically, you pay a management fee (and maybe even a performance fee) to the fund manager in addition to fees normally paid to the underlying hedge funds.
How do hedge funds work for dummies? ›
Hedge funds use pooled funds to focus on high-risk, high-return investments, often with a focus on shorting — so you can earn profit even when stocks fall.
What is the minimum investment in a hedge fund? ›
Hedge Fund Industry at a Glance
Some very wealthy individuals invest in hedge funds. Minimum investments of $100,000 are common, and some require $1 million or more.
Citadel has now made $74 billion for investors since its inception in 1990, more than any other hedge fund firm.
Is BlackRock a hedge fund? ›
BlackRock manages US$38bn across a broad range of hedge fund strategies. With over 20 years of proven experience, the depth and breadth of our platform has evolved into a comprehensive toolkit of 30+ strategies.
Who controls hedge funds? ›
Many hedge funds operating in the U.S. are also regulated by the Commodity Futures Trading Commission (CFTC), including advisers registered as Commodity Pool Operators (CPO) and Commodity Trading Advisors (CTA).
Do billionaires use hedge funds? ›
The recent Forbes 400 (richest American billionaires) list has about 112 people, by my count, who made their fortunes in some form of Finance, Investments, Hedge Funds, insurance or banking.
What do hedge funds do all day? ›
Work days do tend to follow somewhat of a routine, with market open and close being the most critical. In addition to trading, hedge fund managers must also make sure all of their positions are in order, their models up-to-date, and their business/social lives active to keep investors and brokers happy.
Who has the highest salary in hedge funds? ›
In 2023, the highest-paid hedge fund manager was Ken Griffin of Citadel, who earned $4.1 billion. He was followed by Izzy Englander of Millennium Management, who earned $3.2. billion.
Do high net worth individuals invest in hedge funds? ›
High net worth individuals (HNWIs) top the list of qualified hedge funds investors. HNWIs are classified as those possessing investable assets beyond their primary residence exceeding $1 million. Many industry providers set the bar at $5 million.
Why are hedge funds so lucrative? ›
One possibility is the nature of the hedge fund industry – very little regulation, huge pools of equity capital, strategic flexibility, and tremendous liquidity – allows funds to move more quickly to capture value than its primary competitors: the massive, highly regulated, and somewhat stodgy mutual fund industry, or ...
Why would someone invest in a hedge fund? ›
Hedge funds can provide your portfolio with alternative sources of return and different risk exposures by accessing asset classes in unconventional ways, such as shorting, and greater use of derivatives and leverage. Some hedge fund strategies are designed to capture positive returns in all market environments.
How many hedge fund billionaires are there? ›
In total, Forbes counts 47 hedge fund billionaires who have a combined net worth of $312 billion, up slightly from the same number in 2022 who were worth $310 billion.
