Hedge Funds and Role of Regulatory Bodies

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Research Paper

Hedge Funds And the Role of Regulatory Bodies

FACULTY GUIDE

Prof. Priti Bakshi

SUBMITTED BY: Nachiket Patel Swati Choudhary Sakshi Mahajan Shoeb Ali Syed Malhar Narwadkar Amit Goyal

ITM BUSINESS SCHOOL 25/26, INSTITUTIONAL AREA, KHARGHAR, NAVI MUMBAI – 410 210 Page | 1

Letter of Acknowledgement

We are sincerely thankful to ITM Business School and Prof Priti Bakshi for giving us the chance to prepare a research paper on Hedge Funds and the Role of Regulatory Bodies. We are also thankful to her for kind support and various suggestions on many aspects and at various points of time.

Submitted By Nachiket Patel Swati Choudhary Sakshi Mahajan Shoeb Ali Syed Malhar Narwadkar Amit Goyal

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TABLE OF CONTENTS

Topic
1. Introduction to Hedge Funds………………………………….. 1.1 Highlights of hedge funds………………………………..... 1.2 Key features of hedge funds……………………………..... 1.3 file about the hedging Industries…………………………… 1.4 Hedge fund Structure………………………………………. 1.5 Hedging strategies…………………………………………. 1.6 Some hedge fund strategies and their volatility……………. 1.7 Concerns Regarding Hedge Funds 1.7.1 Micro Prudential Concerns 1.7.2 Macro Prudential Concerns 1.8 Benefits from Hedge Funds 2. Role of Regulators……………………………………………… 2.1 Hedge Fund regulation in US……………………………… 2.1.1 Historic Legislative Structure……………………………. 2.1.2 The SEC’s 2004 Rule-making and Goldstein…………… 2.2 Hedge Fund Regulation in UK…………………………… 2.2.1 Hedge funds in UK……………………………………… 2.2.2Regulation of Hedge funds in the UK…………………… 2.2.3Focus of the FSA…………………………………………

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2.2.4 The 2005 report…………………………………………… 2.2.5 Formation of Hedge Fund Working Group……………. 2.3 Hedge Fund Regulation by SEBI …………………………… 3. Conclusion……………………………………………………… Bibliography & Reference……………………………………..

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1. INTRODUCTION TO HEDGE FUNDS A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk. There are approximately 14 distinct investment strategies used by hedge funds, each offering different degrees of risk and return. A relative value hedge fund takes advantage of price or spread inefficiencies. Knowing and understanding the characteristics of the many different hedge fund strategies is essential to capitalizing on their variety of investment opportunities. 1.1 Highlights of hedge funds Hedge fund strategies vary enormously – many, but not all, hedge against market downturns – especially important today with volatility and anticipation of corrections in overheated stock markets. • The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive (absolute) returns under all market conditions. • The popular misconception is that all hedge funds are volatile -- that they all use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities or gold, while using lots of leverage. In reality, less than 5% of hedge funds are global macro funds. Most hedge funds use derivatives only for hedging or don’t use derivatives at all, and many use no leverage. 1.2 Key features of hedge funds • • • • Hedge funds utilize a variety of financial instruments to reduce risk, enhance returns and minimize the correlation with equity and bond markets. Many hedge funds have as an objective consistency of returns and capital preservation rather than magnitude of returns. Most hedge funds are managed by experienced investment professionals who are generally disciplined and diligent. Pension funds, endowments, insurance companies, private banks and high net worth individuals and families invest in hedge funds to minimize overall portfolio volatility and enhance returns. Hedge fund managers usually have...
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