What is a Hedge Fund?
5paisa Research Team
Last Updated: 30 May, 2025 06:13 PM IST

Content
- What is Hedge Fund?
- How Do Hedge Funds Work?
- What Are the Different Types of Hedge Funds in the Market?
- How are Hedge Funds Taxed?
- What are Risk and Return Profile of Hedge Funds?
- Who Should Invest in Hedge Funds?
- How are Hedge Funds Different from Mutual Funds?
A hedge fund is a collective investment managed by a group of authorised or institutional investors.
Investing in a hedge fund is typically thought of as a risky option that targets wealthy and affluent clients and demands a high minimum commitment or, say, net worth.
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Frequently Asked Questions
Mutual funds are regulated investment vehicles that allow everyday investors to pool their money and invest in a diversified portfolio of assets. These are suitable for a wide range of investors, including those engaging in day trading within permissible limits. Hedge funds, on the other hand, are exclusive private investment entities accessible only to accredited investors. They typically follow aggressive investment strategies and are less regulated compared to mutual funds.
Hedge funds can be broadly categorized into four major types based on their investment strategies:
- Global Macro Funds – Focus on economic and political trends across the world.
- Relative Value Funds – Profit from price discrepancies between related securities.
- Activist Funds – Aim to influence a company’s management or strategy to boost value.
- Equity Hedge Funds – Primarily invest in equities, using long and short positions to hedge risks.
Unlike mutual funds, which are tightly governed by SEBI with set rules and investment limits, hedge funds enjoy a more relaxed regulatory framework. Their operational flexibility allows them to take on higher risks and explore a wide array of investment avenues not typically available to mutual funds.
There are several hedge funds operating within or targeting the Indian market. Examples include Munoth Hedge Fund, Quant First Alternative Investment Trust, IIFL Opportunities Fund, and Motilal Oswal’s India Zen Fund, an offshore hedge fund. Each of these employs distinct strategies aimed at delivering returns that are not closely tied to market movements.
Yes, hedge funds are legally permitted in India. However, they are structured as private investment vehicles and are not mandated to register with SEBI in the same way mutual funds are. This gives them greater operational freedom, though they are still subject to certain guidelines under the Alternative Investment Fund (AIF) regulations.