The bad boys of mutual funds

By Sanjay Matai

 

Hedge funds, sometimes referred to as 'hot money', have gained worldwide notoriety for bringing the markets down.

Be it a crash in the currency, stock or bond market, usually a hedge fund prominently figures somewhere in the picture.

 

So, what's a hedge fund? 

How is it different from a mutual fund?
Are hedge funds good for the markets or not?
Should they be allowed to invest in India?

We answer these hot questions and more...

 

Investing with an (h)edge   

Hedge funds are primarily a private pool of money, or rather private funds managed by professionals. Broadly, they can be viewed as a mutual fund of a select few high-networth and high-risk investors.

 

Hedge versus Mutual funds  

 

HFs	MFs
These involve a group of private investors, and minimal regulations.	These involve public money, and are highly regulated.
A limited number of investors.	A higher number of investors.
High minimum investment.	Low minimum investment.
Can be highly leveraged.	Can't be leveraged.
Highly flexible with their investment pattern.	Follow strict investment guidelines, hence are rigid.
High fees.	Low fees, usually fixed by the regulators.
Open only through private placement, usually offered to well-informed, high risk-appetite investors.	Open to the public.
Disclosure requirements are minimal.	Disclosure requirements are high.

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The author is an investment advisor and can be reached at sanjay.matai@moneycontrol.com