How To Start A Hedge Fund In India? Eligibility, Categories & More!

How To Start A Hedge Fund In India? Eligibility, Categories & More!

How To Start A Hedge Fund In India: There are a number of options in India when it comes to professionally managing money. Hedge funds are one way to go out of the many options if you want your money to be managed professionally. 

In this article, we are going to show you How To Start A Hedge Fund In India and how they work. 

What Is A Hedge Fund? 

A hedge fund is a limited partnership of private investors whose money is managed by professional fund managers who use a wide range of strategies, including leveraging or trading non-traditional assets, to earn above-average investment returns. 

How Do Hedge Funds Work? 

These funds use different types of trading techniques because of the securities and assets they invest in. They invest in equities, debt, and also derivatives. 

Examples of derivatives include futures and options. Like with equities and debt securities the trading technique could be trading in a stock market or buying it directly from the company in a private placement. 

Hedge funds pool money from larger investors like high net-worth individuals, endowments, banks, pension funds, and commercial firms. This pooled money is used to invest in such securities in national and international markets. 

There is a long list of securities where hedge funds can invest: equities, bonds, real estate, currencies, convertible securities, and derivatives among others.

Choosing Category For Hedge Fund Or Alternative Investment Fund with SEBI 

SEBI under alternative investment funds regulations has prescribed three types of categories for the alternative investment fund for hedge funds registration under which they can seek registration depending upon the activities of the fund. 

Categories For Hedge Funds Or Alternative Investment Funds  

“Category I Alternative Investment Fund” which invests in start-up or early-stage ventures or social ventures or SMEs or infrastructure or other sectors or areas that the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds. 

Explanation.─ For the purpose of this clause, Alternative Investment Funds are generally perceived to have positive spillover effects on the economy and for which the Board or Government of India or other regulators in India.

might consider providing incentives or concessions shall be included and such funds which are formed as trusts or companies shall be construed as “venture capital company” or “venture capital fund” as specified under sub-section (23FB) of Section 10 of the Income Tax Act, 1961. 

“Category II Alternative Investment Fund” which does not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted. 

Explanation.─ For the purpose of this clause, Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator shall be included. 

“Category III Alternative Investment Fund” which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

Explanation.─ For the purpose of this clause, Alternative Investment Funds such as hedge funds or funds that trade with a view to making short-term returns or such other funds that are open-ended and for which no specific incentives or concessions are given by the government or any other Regulator shall be included. 

Eligibility Criteria For Hedge Fund Registration In India 

• The memorandum of association in the case of a company; the Trust Deed in case of a Trust; or the Partnership deed in case of a limited liability partnership permits it to carry on the activity of an Alternative Investment Fund. 

• The applicant is prohibited by its memorandum and articles of association or trust deed or partnership deed from making an invitation to the public to subscribe to its securities. 

• In case the applicant is a Trust, the instrument of trust is in the form of a deed and has been duly registered under the provisions of the Registration Act, 1908. 

• In case the applicant is a limited liability partnership, the partnership is duly incorporated and the partnership deed has been duly filed with the Registrar under the provisions of the Limited Liability Partnership Act, 2008. 

• In case the applicant is a body corporate, it is set up or established under the laws of the Central or State Legislature and is permitted to carry on the activities of an Alternative Investment Fund. 

• The applicant, Sponsor, and Manager are fit and proper persons based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. 

• The key investment team of the Manager of Alternative Investment Fund has adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has a relevant professional qualification.

• The Manager or Sponsor has the necessary infrastructure and manpower to effectively discharge its activities. 

• The applicant has clearly described at the time of registration the investment objective, the targeted investors, the proposed corpus, investment style or strategy, and the proposed tenure of the fund or scheme. 

• Whether the applicant or any entity established by the Sponsor or Manger has earlier been refused registration by the Board. 

Who Should Invest In Hedge Funds? 

Since hedge funds are those mutual funds that are managed by experts, they tend to be quite costly. They can be easily afforded by those who have surplus funds and a good risk appetite.

Also Read: Call Writing Vs Put Writing – What’s The Difference?

In Closing

Hedge funds are complex in their structure and strategy. They invest in almost every asset so they are heavily diversified. However, strategies like arbitrage and long/short selling keep it higher on the risk rack.

As an investment product explore these only if they align with your goals and do your due diligence in research before proceeding. That’s all for the post on How To Start A Hedge Fund In India, We hope you enjoyed reading it. Happy Investing!

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