Hedge Funds Gain

Context

Hedge funds are reaping significant gains after Chevron’s $53 billion acquisition of Hess Corp finally concluded, following a 20-month delay caused by arbitration challenges from ExxonMobil.

Hedge Funds

Definition and Nature

A hedge fund is a private investment partnership that pools funds from high-net-worth individuals or institutional investors.
It is managed by professional portfolio managers who employ aggressive and diverse strategies to maximize returns, including:
- Leverage (borrowed money)
- Derivatives
- Short-selling
- Arbitrage
- Investing in non-traditional assets (commodities, currencies, real estate)

Risk Profile and Investor Base

Hedge fund investments are classified as alternative investment vehicles and are considered high-risk, high-return.
They typically require a high minimum investment or net worth, thus targeting:
- Accredited investors (with income > $200,000/year or net worth > $1 million excluding primary residence).
- Institutional investors like pension funds, endowments, and insurance firms.

Regulatory Framework

In India, hedge funds are not necessarily required to be registered with SEBI (Securities and Exchange Board of India), though Alternative Investment Funds (AIFs) under Category III may include hedge fund-like structures.
Globally, hedge funds are less regulated compared to mutual funds, particularly in jurisdictions like the Cayman Islands or British Virgin Islands where offshore hedge funds are domiciled.

Hedge Fund vs. Mutual Fund

Aspect	Hedge Fund	Mutual Fund
Target Investor	Accredited / wealthy investors	General public / retail investors
Instruments Used	Real estate, stocks, derivatives, currencies	Stocks, bonds, money market instruments
Regulation	Lightly regulated (e.g., SEC, SEBI-AIF Cat III)	Heavily regulated (e.g., SEBI, SEC)
Liquidity	Limited; Lock-in periods often apply	High liquidity; redeemable on demand
Strategy	High-risk, high-return, often speculative	Conservative to moderate, long-term growth
Fee Structure	High fees; typically "2 and 20" (2% mgmt + 20% profit)	Low fees (usually 0.5%–2%)