Hedge Fund

Hedge funds pool money from high-net-worth individuals (HNIs) and institutional investors and use advanced investment strategies to generate high returns, regardless of market direction.

1️⃣ Fundraising 💵

• Investors commit capital to the hedge fund.
• High minimum investment required (₹1 crore+ in India).

2️⃣ Investment Strategies 🎯

• Long-Short Strategy: Buy undervalued stocks (long) & short overvalued stocks (short).
• Arbitrage: Profit from price differences in different markets.
• Leverage & Derivatives: Use borrowed money and options, futures for higher returns.

3️⃣ Performance-Based Fees 💰

• Management Fee (e.g., 2% of assets under management).
• Performance Fee (e.g., 20% of profits).

4️⃣ Liquidity & Lock-In 🔒

• Investors may have a lock-in period (e.g., 1-3 years) before they can withdraw funds.

Hedge funds are classified based on their investment approach, asset class, and risk profile. Here are the main types:

1️⃣ Equity Hedge Funds – Invest in stocks; can be long-only, long/short, or market-neutral.
2️⃣ Global Macro Funds – Trade across global markets based on economic trends.
3️⃣ Event-Driven Funds – Focus on mergers, acquisitions, and restructurings.
4️⃣ Arbitrage Funds – Profit from price differences in related assets.
5️⃣ Fixed-Income Funds – Invest in bonds and credit instruments for stable returns.
6️⃣ Quantitative (Algo) Funds – Use AI and algorithms for automated trading.
7️⃣ Multi-Strategy Funds – Combine multiple approaches for diversified returns.

Hedge funds are high-risk, high-reward investments, best suited for:

✅ High-Net-Worth Individuals (HNIs) – Investors with a high risk appetite & large capital.
✅ Institutional Investors – Pension funds, endowments, & family offices seeking diversification.
✅ Experienced Investors – Those familiar with alternative investments & complex strategies.
✅ Investors Seeking Absolute Returns – Hedge funds aim for profits regardless of market direction.

🚫 Not suitable for retail investors due to high minimum investment (₹1 crore+ in India) & risk factors.

🔴 Risks of Hedge Funds

1️⃣ High Market & Strategy Risk – Leverage & complex strategies can amplify losses.
2️⃣ Liquidity Risk – Lock-in periods & limited redemption options.
3️⃣ Regulatory & Transparency Risk – Less oversight compared to mutual funds.
4️⃣ High Fees – Typically "2% management fee + 20% performance fee", reducing net returns.

🟢 Returns of Hedge Funds

✅ Potential for High Returns – Uses aggressive strategies to outperform traditional markets.
✅ Absolute Returns Focus – Aims for gains in both bull & bear markets.
✅ Diversification Benefits – Low correlation with traditional assets like stocks & bonds.

In India, hedge funds are regulated under SEBI’s Alternative Investment Fund (AIF) - Category III.

✅ Minimum Investment: ₹1 crore per investor.
✅ For Accredited Investors: Minimum ₹25 lakh.
✅ Institutional Investors: Typically invest ₹10 crore+.

Hedge funds in India operate as Alternative Investment Funds (AIF) - Category III, and their taxation differs from mutual funds.

📌 Tax Structure:

1️⃣ Pass-Through Taxation ❌ (Not Applicable)

• Unlike AIF Category I & II, Category III AIFs (Hedge Funds) do not have pass-through taxation.
• The fund itself is liable to pay tax, not the investors individually.

2️⃣ Tax on Hedge Fund Income

• Short-Term Capital Gains (STCG) 📉 (if securities held < 1 year): 15%
• Long-Term Capital Gains (LTCG) 📈 (if securities held > 1 year): 10% (above ₹1 lakh gain)
• Business Income Tax 🏦 (if trading actively): Taxed as per corporate tax rates (~30% for companies).

3️⃣ Dividend Income 📩

• Taxed as per the investor’s individual slab rate since dividend distribution tax (DDT) is removed.

📌 Summary:

• Hedge funds pay tax at the fund level before distributing profits.
• Investors do not directly pay tax on fund earnings, but on any payouts received.