Hedge funds often come wrapped in a layer of mystery. Whenever you hear the term you think of aggressive strategies, large sums of money, elite investors. And in many ways, that’s true. While they do sound like mutual funds as they gather money from investors and put it into various assets but that they are similar only at surface level. —Hedge funds are a unique kind of investment
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Hedge funds follow far fewer rules, take on much more risk, and cater to a very specific type of investor—usually wealthy and well-informed. So what makes them so different? And why aren’t they for everyone?
In this article, we’ll unpack three core features that truly set hedge funds apart from the rest.
1. Hedge funds are exclusive by design
One of the most fundamental aspects of hedge funds is that they are not for everyone. They are exclusive by design. Think about it, if you want to invest in a mutual fund, you can start with a small amount like ₹500 or ₹1,000. But to invest in hedge funds you need a much higher amount of money, often starting at ₹1 crore or more. Hedge funds are purposely made exclusive to limit access to credible investors, high-net-worth individuals (HNIs), and large institutions such as pension funds or family offices.
This exclusivity has two purposes.
- The investors have the financial capacity to stay calm during market volatility and potential losses, which are more pronounced in hedge fund strategies.
- Second, it filters out people, and only keeps those with a deeper understanding of complex financial products and risk structures.
This feature makes hedge funds unsuitable for the general investing public and positions them as unique investment instruments.
2. Hedge Funds don’t follow investing rules
While mutual funds typically follow a benchmark-driven or risk-adjusted return strategy, hedge funds have a single goal: to make profits in all market conditions—whether rising, falling, or sideways. This goal leads them to use unconventional, high-risk strategies, including:
- Short selling: Betting on the decline of asset prices.
- Leverage: Borrowing capital to magnify exposure and potential returns.
- Derivatives and structured products: Using options, futures, swaps, and other instruments to hedge or speculate on complex scenarios.
- Event-driven or global macro strategies: Tapping into corporate restructurings, geopolitical events, or economic imbalances for arbitrage.
These strategies come with high risk. Yes, there’s a chance to earn big profits, but there’s also a chance to lose a lot of money.
Hedge fund managers say the risk is worth it because their methods don’t depend on how the stock or bond markets are doing. This is why some investors choose hedge funds—to add something different to their portfolio and spread their risk.
3. Hedge Funds lacks transparency
The most controversial feature of hedge funds is their non transparent structure. Unlike mutual funds, hedge funds don’t have to register with SEBI (the market regulator). They don’t need to share their daily value (called NAV) or give regular updates to the public. If they do report, it’s usually just a few times a year and only to select big investors.
Because of this, hedge fund managers have more freedom. They can quickly change their investment plans, shift money around, or sell assets—without anyone watching closely. But this also means investors don’t always know what’s going on and must fully trust the fund manager.
In the eyes of the law, hedge funds are treated more like private investment groups. In India, they fall under SEBI’s Category III AIFs. This setup lets them try new and complex investment ideas, but if things go wrong, it can cause big problems—especially if the fund isn’t run properly.
Final thoughts
Hedge funds aren’t your typical investment vehicles. Think of them less as mutual funds for the masses and more as tightly guarded, strategy-heavy playgrounds for the wealthy and well-informed.
By design, hedge funds cater only to accredited investors—those with deep pockets and a high tolerance for risk. This exclusivity allows them to operate outside many of the regulatory constraints that bind other investment products. They can go long, short, leverage heavily, or bet on obscure instruments. And unlike mutual funds, they disclose little to the public, offering opacity in exchange for agility.
What sets hedge funds apart?
- Exclusivity: Not everyone gets a seat at the table. Entry is restricted to high-net-worth individuals and institutions.
- Aggressive Playbook: From derivatives to global macro bets, the strategies are sophisticated—and often speculative.
- Low Transparency: Limited reporting requirements mean investors must rely on the fund manager’s skill and judgment.
For those who qualify and understand the terrain, hedge funds can be potent vehicles for outsized returns. But they are also reminders of a core market truth: higher returns often come wrapped in layers of risk, complexity, and access not available to most.
