Question

Please describe in detail the function of hedge funds and their role in modern finance.

Answer 1

Ans - Hedge Funds in the context of investing simply means to safeguard against the risks. Hedge Fund is an alternative pool of investment where different strategies are used to make an active return for the investors. Hedge Funds are a type of mutual funds which is privately managed by the experts that why it is costlier.

Functions of Hedge Funds:-

1 Diverse portfolio- Hedge Funds offers a wide range of investment opportunities such as derivatives, stocks, real estate, currencies, bonds, etc. Mostly they cover all the asset classes.

2 Higher Fees - Hedge Fees are costly as compared to other investment instruments because they charge two and twenty fess structure that means 2% for asset management and 20% fees from the profit.

3 Higher Risks- Hedge funds are exposed to bigger risks and can result in big losses for investors. Investment period i.e Lock-in period is generally long in Hedge funds.

4 High Net worth Investors - Hedge Funds clients are High Net worth Individuals, Banks, insurance companies, pension funds, etc. The minimum ticket size required for investors to invest in these funds is 1 crore in Indian rupees i.e $144215 in US dollar.

Hedge Funds plays a very significant role in the capital market in modern finance. Hedge Funds are playing very important factors in contributing to the global economy.

1 Hedge Funds are contributing to the capital market thereby enhancing economic growth. There should be a balance between market finance and lending of banks because over-dependent on banks will reduce the economic growth and hedge funds are playing important factors by growing capital market which will fuel the economic growth.

2 Hedge Funds Promotes good positive governance in the firm in which it invests. Good governance practices enhance better performances of the firm in the long term thereby protecting peoples pensions and savings.

3 Hedge Funds helps in improving the capital market. The studies show that growing capital market will help in increasing the long term economic growth in per capita GDP by 20 percent.

4 Hedge funds do not pose a systematic risk because the pool of investment is less and losses are bear by the investors unlike the bankers or any company which have a ripple effect throughout the economy if they go bankrupt.