Consider the following statements about “Hedge funds”:
1. Retail investors contribute significantly to these funds.
2. Hedge funds generally have a short lock-in period.
3. It offers diversified investment options.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 3 only
(d) 1, 2 and 3
Explanation Statement 1 is not correct: Hedge funds are primarily open to high-net-worth individuals (HNIs) and institutional investors, due to their high-risk, high-return strategies. In India, they are regulated under Category III of SEBI's Alternative Investment Funds (AIFs) and not meant for retail participation. SEBI AIF Regulations say that “AIFs shall not accept from an investor, an investment of value less than 1 crore rupees”.
Statement 2 is not correct: Hedge funds often impose lock-in periods to ensure capital stability, which can range from several months to years, depending on the fund's strategy and terms. This characteristic indicates that the lock-in period is generally not low.
Statement 3 is correct: A hedge fund portfolio consists of asset classes like derivatives, equities, bonds, currencies and convertible securities. So Hedge funds have a wide portfolio of investments.
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