EMERGENCE OF HEDGE FUNDS AS A INVESTMENT

VEHICLE AND ITS COMPARISON WITH MUTUAL

FUNDS

ASHOK ANCHAN 61
MERLYN COELHO 65
JANCYRANI NADAR 85
OLSON PERERIA 89
SWATI SHETTY 96
UJWALA TODKAR 102
 HEDGE FUNDS EXPLAINED
A private portfolio of investments that uses advanced investment and risk management strategies to
generate good returns is known as Hedge fund.

The fund allows only a limited number of accredited investors, who pool their money with the fund
manager who invest the money in different types of assets. The fund manager charges a fee for
the management of funds, which depends on the profits earned by the assets of the fund.

A hedge fund is an investment partnership, where only a few high net worth investors can make an
investment in the fund. The minimum amount of initial investment in the fund is relatively high. The
fund is set free from strict regulations.

However, the fund uses those financial instruments which minimize risk and enhance returns.
HISTORY OF HEDGE FUNDS

Former writer and sociologist Alfred Winslow Joness company, A.W. Jones &
Co. launched the first hedge fund in 1949.

It was while writing an article about current investment trends for Fortune that
Jones was inspired to try his hand at managing money. He raised $100,000
(including $40,000 out of his own pocket) and set forth to try to minimize the
risk in holding long-term stock positions by short selling other stocks.

In 1952, Jones altered the structure of his investment vehicle, converting it from
a general partnership to a limited partnership. Jones earned his place in
investing history as the father of the hedge fund.

However, as hedge fund trends evolved, in an effort to maximize returns, many

funds turned away from Jones' strategy, which focused on stock picking
coupled with hedging and chose instead to engage in riskier strategies based
on long-term leverage.
 ADVANTAGES OF HEDGE FUNDS
Ability to reduce losses
One of the key benefits of investing in hedge funds is their ability to reduce losses during share
market sell-offs.

Capital Reservation
Hedge fund managers think about risk in terms of loss of capital, and actively manage risk to try
to limit their losses.
A traditional fund manager, by contrast, tends to think about risk in terms of performance
deviation from a benchmark, and will generally lose as much as the market does in difficult
times.

Diversifiction
By reducing exposure to general market movements and only targeting specific risks, a hedge
fund can produce a return stream that has a low level of correlation with, and a lower level of
downside volatility than, general risk assets like equities.
 DISADVANTAGES OF HEDGE FUNDS
Large Investment Fees
One major disadvantage of hedge funds, and a highly criticized one as well, is the often high fees one must pay in order to invest
in hedge funds.

Standard Deviation
Another disadvantage to hedge funds is the use of the statistical tool known as the standard deviation. The statistic can provide
a good measure of potential variation in gains during the year, however the downside is that the standard deviation cannot
indicate the overall big picture of the risk of return.

Downside Capture
The downside capture is a risk management measure used to assess what level of correlation a hedge fund has to a specific
market when that particular market is on the decline. The smaller the downside capture measure of a fund, the better equipped
the hedge fund is to handle a market decline.

Drawdown
The drawdown is basically a statistic that provides an estimation in the overall rate of return on an investment compared to that
investments most recent highest return, a peak-to-valley ratio.

Leverage
Leverage is an investment measure thats often overlooked as being the main factor in hedge funds acquiring large losses.
Basically, when leverage rises, any downsides in investment returns are magnified, often causing the hedge fund to sell off its
assets at a cheap price
 TYPES OF HEDGE FUNDS

Long-Short Funds:
Take both long and short positions in securities in hopes of using superior stock picking strategies to outperform the general
market.

Market-Neutral Funds:
A sub-type of a long-short fund, however fund managers attempt to hedge against general market movements (thus the
name "market neutral").

Event-Driven Funds:
An attempt to capture gains from market events, such as mergers, natural disasters or political turmoil.

Macro Funds:
Take directional bets on the market as a whole, either long or short, based upon research and/or the fund's philosophy.
MUTUAL FUNDS EXPLAINED

By the term, mutual fund, we mean an investment vehicle in which a number of investors pool
their resources for a common goal established by the fund.
The investors collect and pool their money with the fund manager, who use the pool of funds to
invest in a diversified basket of securities in the capital market such as stocks, bonds and
other tradable goods.
The return on the mutual fund depends on its performance, if the value rises, the return
increases and in the reverse case, the return might fall.
DISADVANTAGE OF MUTUAL FUNDS
 Key Differences Between Hedge Fund
and Mutual Fund

1. A hedge fund is described as a portfolio investment

whereby, only a few accredited investors are allowed to
pool their money together to buy Assets

2. Mutual funds refer to a professionally managed

investment vehicle, where the funds are collected from
several investors are pooled together to purchase
securities.
 Key Differences Between Hedge Fund and Mutual
Fund.. Continued

3. Hedge funds seek absolute returns. Conversely, mutual funds

seek relative returns on the investment made in securities.

4. Hedge funds are aggressively managed, where advanced

investment and risk management techniques are used to reap
good returns, which is not in the case of mutual funds.
Hedge Fund Vs Mutual Fund By
Prof. Simply Simple
Hedge funds are like mutual funds in
some ways. Investment professionals
in a hedge fund pool in money from
investors to be managed - exactly like
the mutual funds do. And, subject to
some minor restrictions, investors in
hedge funds can withdraw their money
as they can in a mutual fund. Nothing
else is similar. Let me explain the
differences
 Difference 1
Hedge Funds Mutual Funds

Focus on absolute Focus on relative

returns returns. Returns
should be higher than
benchmark
 Difference 2
Hedge Funds Mutual Funds
Can invest in any asset Work within a risk
class - stocks, bonds, controlled and compliance
commodities, real estate, framework set up by the
private partnerships, - or regulator. Hence very risky
exotic debt products like asset classes are
packaged sub-prime prohibited for investment
mortgages.
 Difference 3
Hedge Funds Mutual Funds

They can borrow They can borrow

to bet bigger and but within SEBI
enhance returns. guidelines
 Difference 4
Hedge Funds Mutual Funds

They can run highly The objective is to

concentrated protect investors
portfolios. investment and
hence
diversification is the
key principle.
 Difference 5
Hedge Funds Mutual Funds
Meant for those who are Meant for people at large
already rich. Hedge funds are providing them with an option
open only to 'accredited of building wealth through
investors' defined as those equity and debt investments.
with net worth of more than Mutual Funds allow even small
$1.5 million, or income in investors to participate.
excess of $200,000 in each of
the past two years. The good
ones demand $1 million or
more of investment.
 Difference 6
Hedge Funds Mutual Funds

Work on 2/20 basis which They charge 1.25% on

means they charge 2% a
the first 100 crores of the
year by way of
AUM managed. Annual
management fees and
expenses can go upto
20% of the net profit. They
2.25% to 2.50%.
do not share in losses.
 Difference 7
Hedge Funds Mutual Funds

Hedge funds are Mutual funds are

virtually heavily regulated
unregulated. because investor
safety is the most
important
requirement
 Difference 8
Hedge Funds Mutual Funds

They are sold as

They cannot products to
market enhance wealth
themselves
publicly
 Conclusion
If you are an amateur to the capital market and wants to
invest in one of these two funds, then you can make a
choice as per your resources. If you have a large amount
of money, then you can go for hedge funds, whereas if
your investment amount is low then you can opt for
mutual funds.