Hedge fund
Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
A hedge fund pools money from wealthy, sophisticated investors and is only lightly regulated. It aims for high returns using aggressive tools:
- Leverage: investing borrowed money on top of its own.
- Short selling: selling shares it does not own, hoping to buy them back cheaper.
- Derivatives: contracts whose value comes from another asset.
These tools can multiply gains but also losses. In India, hedge-fund strategies run through Category III Alternative Investment Funds (AIFs), which SEBI regulates under its 2012 AIF regulations. The minimum investment is Rs 1 crore.
Example
A Category III AIF borrows money to increase its bets. It buys shares it expects to rise and short-sells shares it expects to fall. It also uses Nifty options to protect itself against a market crash. Only investors who can put in at least Rs 1 crore may join.
Don't confuse with
- Mutual fund: open to small retail investors, tightly regulated by SEBI, and mostly limited to buying securities. A hedge fund is for the rich and freely uses leverage and short selling.
Related concepts
- Mutual fund
- Net Asset Value
- Systematic Investment Plan
- Index fund
- Exchange-Traded Fund
- Gold ETF
- Fund of funds
- Real Estate Investment Trust
- Infrastructure Investment Trust
- Domestic institutional investors