| July 28,2010 01:06 pm IST
A hedge fund can be defined as an investment structure that manages a private unregistered pool and compensates the fund manager with an incentive based fee based on a percentage of the profits earned by the fund.
Hedge funds, in general, are not registered.
They have avoided registration by limiting the number of investors and requiring that their investors meet an income or a net worth standard. Furthermore, hedge funds are also prohibited from soliciting or advertising to the general audience.
The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital, and deliver positive returns under all market conditions.
How they work
To achieve pre-set returns target, these funds do not restrict themselves to their country of origin and operate on a global scale. Hedge fund managers typically seek absolute positive investment performance. This means that, the hedge funds target a specific range of performance, and attempt to produce targeted returns irrespective of the stock market trends. This is in contrast to investments by mutual funds, where success or failure is often measured in terms of performance in relation to a stock index, like the Sensex or Nifty.
The hedge fund structure helps the investor turn market opportunities into investment returns . The investor brings funds to the industry, these funds are pooled in investment structures called hedge funds, and this structure gives the investor access to hedge fund managers who provide investment expertise and use alternative investment strategies.
For investors this structure:
1. helps pool assets with those of other investors
2. is a way to access talented hedge fund managers
3. is a method to access the alternative investment strategies used by the manager
Only for heavyweights ( The Investment Size)
Hedge funds specifically target high net worth investors with huge investible corpus. Most of these funds limit the number of investors by setting a high minimum investment., The minimum investment size for hedge funds ranges from $100,000 to $10 million. Huge inflows are required because of the risks and the type of instruments they deal in .
As most hedge funds do not allow their corpus size to exceed $100 million, they normally allow only about 100 investors .