Types Of Hedge Funds In India: Strategies, Risks, And Returns
Hedge funds are advanced investment vehicles that deploy a range of aggressive strategies, including leverage, short-selling, derivatives, and arbitrage, to deliver high returns. Typically reserved for High Net Worth Individuals (HNIs) and institutional investors, hedge funds in India require significant capital and risk appetite, making them distinct from traditional mutual funds.
In this article, we will break down the types of hedge funds in India, the strategies they use, and what makes them a compelling (yet complex) part of the alternative investment landscape.
Overview: The Diversity Of Hedge Fund Types
Hedge funds pool capital from high-net-worth individuals and institutional investors, operating with greater flexibility than conventional investment options. They use complex strategies, including leverage, short selling, and derivatives that standard mutual funds cannot access, making them professionally managed investment pools. Hedge funds are private investment vehicles in India.
These funds aim for absolute returns regardless of market conditions, seeking to capture upside while limiting downside risk. For Indian investors, the minimum capital requirement starts at INR 1 crore, limiting access to those with substantial financial resources.
Understanding the various types of hedge funds is important for investors, as each type comes with distinct strategies with unique risk-return profiles.
Types Of Hedge Funds In India
Hedge funds in India operate under SEBI's Alternative Investment Funds (AIF) Category III regulations, introduced in 2012. They are SEBI-approved alternative investments.
Here are the main types of hedge funds, which you should know to invest in top hedge funds in India.
1. Global Macro Hedge Funds
These funds take positions based on economic indicators, geopolitical events, and central bank policies. They analyse inflation rates, interest rates, and currency movements to anticipate market shifts. This comprehensive approach allows them to capitalise on global economic trends across multiple asset classes.
2. Equity Hedge Funds
Focusing on equity markets both domestically and internationally, these funds buy undervalued stocks while selling overvalued ones. This hedging strategy provides protection against market downturns while maximising potential returns.
3. Activist Hedge Funds
These funds acquire significant ownership stakes in companies to influence decision-making. Activist hedge funds engage with management to implement strategic changes, including cost reduction, asset restructuring, or board composition changes. Their approach aims to unlock shareholder value through direct corporate intervention.
4. Relative Value Hedge Funds
Operating as market efficiency specialists, these funds identify pricing discrepancies between related securities. Using strategies like statistical arbitrage and convertible arbitrage, they exploit temporary price differences while maintaining relatively low market exposure.
Read: PMS vs AIF In India: Key Differences, Taxation And Which One To Choose
Risks And Returns Of Hedge Funds
Key Risks of Hedge Funds
Before starting your investment journey with hedge funds, let us have a quick glance over some of the risks associated with it.
| Risk Factor | Global Macro Hedge Funds | Equity Hedge Funds | Activist Hedge Funds | Relative Value Hedge Funds |
| Market Risk | High Heavily exposed to broad economic and market directional movements; incorrect macroeconomic forecasts can lead to significant losses | Medium-high Partial market exposure despite hedging; vulnerable to significant market dislocations and correlation breakdowns | Medium Concentrated exposure to specific companies rather than broad markets; company-specific catalysts may provide partial insulation from market moves | Low-medium Generally market-neutral positioning; however, correlation and spread relationships can break down during market stress |
| Liquidity Risk | Medium Typically invests in liquid markets but may face challenges during severe market disruptions | Medium Generally invests in liquid securities, but short positions can face recall risk during market stress | High Concentrated positions in specific companies, often with significant ownership percentages, creating potential exit challenges | Medium-high Strategies may involve less liquid securities or derivatives, creating potential exit challenges during market dislocations |
| Leverage Risk | Medium-high Often employs moderate to significant leverage to increase returns on macroeconomic positions | Medium Typically uses leverage for both long and short positions, amplifying both gains and losses | Low-medium Generally employs lower leverage than other strategies, as position sizes are already concentrated | High Often employs significant leverage to magnify returns on small pricing inefficiencies |
| Manager Risk | High Heavy dependence on manager’s macroeconomic forecasting abilities; discretionary decisions critical to performance | High Success depends on security selection skills and timing of both long and short positions | High Highly dependent on manager’s ability to identify undervalued companies and ensure operational improvements | Medium While models guide many decisions, manager judgment in model selection and risk parameters remains crucial |
| Concentration Risk | Low-medium Typically diversified across assets and geographies, though may concentrate on specific macroeconomic themes | Medium Often has diversified holdings, though may concentrate in specific sectors or themes | Very High Typically holds concentrated positions in a small number of target companies | Low Generally well-diversified across multiple securities and arbitrage opportunities |
| Transparency Risk | Medium Generally clear about macro positioning but may not disclose specific instruments or leverage | Medium May not fully disclose short positions or sector exposures | Low-medium Strategy typically requires public disclosure of positions and intentions due to regulatory requirements | High Often employs complex strategies with limited disclosure about specific arbitrage opportunities or mathematical models |
Historical Returns
Hedge fund returns typically show countercyclical performance, often outperforming traditional investments during market downturns. The average return from hedge funds globally ranges between 10%-15%+ annually over extended periods, though top performers deliver substantially higher results1.
They seem higher compared to other investments, including equity mutual funds, debt funds, and gold.
Here are their returns over the period of 5+ years.
| Hedge Funds | 10%-15%+ |
| Equity Mutual Funds | 12%-14%+ |
| Debt Funds | 8%-10% |
| Corporate Bonds | 14%-16% |
Read: What Are Corporate Bonds: Meaning, Benefits, And How To Invest?
How Investors Can Mitigate Risks
While hedge funds are known for their high-risk, high-reward nature, investors can manage this risk through strategy selection, diversification, and disciplined allocation. Here is how to approach hedge fund investing more wisely.
1. Diversification: Allocate investments across multiple hedge funds with different strategies to reduce concentrated risk.
2. Due Diligence: Research the fund manager's track record, experience, and investment philosophy before committing capital.
3. Strategy Comprehension: Understand the fund's investment approach and associated risks. Avoid investments whose strategies you cannot clearly explain.
4. Liquidity Planning: Assess your liquidity needs carefully before committing to funds with extended lock-in periods.
5. Professional Guidance: Consult financial advisors specialising in high-net-worth investment strategies to determine if hedge funds fit within your overall financial plan.
Conclusion
Hedge funds offer sophisticated investors a powerful edge, leveraging advanced strategies like long-short, arbitrage, and derivatives to deliver non-traditional returns. Their ability to enhance portfolio diversification, access niche opportunities, and operate with greater flexibility makes them a valuable tool in the realm of alternative investments in India.
As SEBI's regulatory framework continues to evolve, hedge funds in India are gaining momentum among HNIs and institutional investors seeking higher alpha and tailored risk exposure.
For investors exploring newer, regulated, and high-yield fixed-income alternatives, platforms like Grip Invest offer easy access to curated opportunities that balance returns, risk, and transparency.
FAQs On Types Of Hedge Funds In India
1. How risky are hedge funds compared to mutual funds?
Hedge funds carry significantly higher risk than mutual funds through their use of leverage, derivatives, and complex strategies. While mutual funds operate under strict regulations focused on investor protection, hedge funds prioritise returns with fewer restrictions, limiting participation to accredited investors who can absorb potential losses.
2. Can retail investors access hedge funds?
No, retail investors cannot access hedge funds in India. SEBI regulations require a minimum investment in hedge funds of INR 1 crore, effectively limiting participation to high-net-worth individuals and institutional investors.
3. What is the average return from hedge funds?
The average hedge fund returns in India and globally range between 10-15%+ annually, varying based on strategy, market conditions, and manager skill.
References:
1. The Economic Times, accessed from: https://economictimes.indiatimes.com/markets/stocks/news/hedge-funds-deliver-double-digit-returns-in-2024/articleshow/116899179.cms?from=mdr
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