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Consider the following statements with reference to Hedge Funds:
- They are unregistered private investment partnerships or funds.
- They are available to qualified or accredited high net worth individuals.
- Hedge funds are subject to regulatory provisions similar to Mutual Funds.
Which of the statements given above is/are Correct?
- a)2 only
- b)1 and 2 only
- c)1 and 3 only
- d)1, 2 and 3
Correct answer is option 'B'. Can you explain this answer?
Most Upvoted Answer
Consider the following statements with reference to Hedge Funds: They ...
Explanation:
- Hedge Funds are unregistered private investment partnerships or funds. This means that they are not required to register with the Securities and Exchange Commission (SEC), unlike mutual funds.
- Hedge funds are available to qualified or accredited high net worth individuals. This means that only investors who meet certain minimum net worth requirements are allowed to invest in hedge funds.
- Hedge funds are subject to regulatory provisions similar to Mutual Funds. While hedge funds are not required to register with the SEC, they are still subject to certain regulatory provisions such as the Investment Advisers Act of 1940 and the Commodity Exchange Act.
Therefore, the correct answer is option 'B' i.e. 1 and 2 only.
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Community Answer
Consider the following statements with reference to Hedge Funds: They ...
To hedge means to safeguard, and in the context of investing, it means to protect against risks. Hedge funds are alternative investments using pooled funds that employ different strategies to earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns.
- The Features & Benefits of Hedge Funds: Hedge fund industry in India got a green flag in 2012 when the Securities and Exchange Board of India (SEBI) allowed alternative investment funds (AIF).
- They have the following features: High Net-Worth Investors: Only qualified or accredited investors can invest in hedge funds. They are mainly high net worth individuals (HNIs), banks, insurance companies, endowments, and pension funds. The minimum ticket size for investors investing in these funds is Rs 1 crore. Hence, statement 2 is correct.
- Diverse Portfolio: Hedge funds have a comprehensive portfolio of investments ranging from currencies, derivatives, stocks, real estates, equities, and bonds. Yes, they necessarily cover all the asset classes only limited by the mandate.
- Higher Fees: They work on the concept of both expense ratio and management fee. Globally, it is ‘Two and Twenty’, meaning there is a 2% fixed fee and 20% of profits. As for hedge funds in India, the management fee can be well below 2% to below 1%. And the profit-sharing varies between 10% to 15% generally.
- Higher Risks: Hedge funds investment strategy can expose funds to huge losses. The Lock-in period generally for investment is relatively long. Leverage used by these funds can turn investments into a significant loss.
- Taxation: The Category III AIF (hedge funds) is still not given pass-through status on tax. This implies that income from these funds is taxable at the investment fund level. Hence, the tax obligation will not pass through to the unit-holders. This is a disadvantage for this industry as they are not on a level playing ground with other mutual funds.
- Regulations: It is not required that hedge funds be registered with the securities markets regulator and have no reporting requirements including regular disclosure of Net Asset Values (NAV). i.e. they are unregistered private investment partnerships or funds. Hence, statement 1 is correct.
- Mutual funds are registered with securities markets regulator and are subject to the provisions of the relevant regulations such as offer/issue of units/securities, disclosure and reporting requirement, valuation for the purpose of computation of NAV, conflict of interest issue and limit leverage. Hedge funds are not required to be registered and therefore, are not subject to similar regulatory provisions. Hence, statement 3 is not correct.
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Consider the following statements with reference to Hedge Funds: They are unregistered private investment partnerships or funds. They are available to qualified or accredited high net worth individuals. Hedge funds are subject to regulatory provisions similar to Mutual Funds.Which of the statements given above is/are Correct?a)2 onlyb)1 and 2 onlyc)1 and 3 onlyd)1, 2 and 3Correct answer is option 'B'. Can you explain this answer?
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