Hedge Funds & Vulture Funds - Their Existence And Their Impact On The Indian Economy

Hedge Funds & Vulture Funds

- Their existence and their impact on the Indian Economy

The funds have given a plenty of opportunity for people to diversify their portfolios but they are very mysterious. Let us have a look in the context of Indian economy what effects does this mysterious funds have on the country.

Submitted By:

Pralabh Bhargava (07BS2905)

Rishikant (07BS3437)

 

ICFAI BUSINESS SCHOOL HYDERABAD

BONAFIDE CERTIFICATE

It is Certified that this project report "Hedge Funds & Vulture Funds " is the bonafide work of "PRALABH BHARGAVA (07BS2905) AND RISHIKANT (07BS3437)" who carried out the project work under my supervision.

SIGNATURE

PROF. S. V. SHESHIAH

ECONOMICS FACULTY

ICFAI BUSINESS SCHOOL,

Survey No: 156/157, Dontanapally Village,

Shankerpally Mandal, R R District,

Hyderabad - 501504

 

ACKNOWLEDGMENT

We as a group take this opportunity to express our gratitude towards certain key people for their constant guidance and support, without which the project would not have been a success.

We express our gratitude to Prof. S. V. SHESHIAH, ECONOMICS FACULTY Ð'- ICFAI BUSINESS SCHOOL, Hyderabad.

We extend our sincere thanks to our section friends whose guidance and encouragement was of great help in meeting the intended objective of our project.

 

Table of Contents

Executive Summary 5

Introduction 7

1. Hedge Funds: 7

2. Vulture Funds: 7

Objectives 8

Hedge Funds Ð'- Some Concerns 8

Micro Level Concerns 10

Macro Level Concerns 10

Benefits from Hedge Funds 11

Policy Options for Regulating Hedge Fund 12

What SEBI Is Doing 14

Financial Implications 16

Going Forward 18

Conclusion 19

References 21

 

Executive Summary

We have already seen that the existence of Hedge Funds and Vulture funds is inevitable in a rapidly growing economy like India. It does not only provide extra source of finance to companies but it also provides impetus to the growth of the economy.

Due to the ever-increasing amounts under management and their unregulated and opaque nature, hedge funds have emerged as a key concern for policymakers. While until now, hedge funds have been left essentially unregulated, we are seeing increasing calls for regulation for both micro and macro level reasons.

In our view, most calls for the regulation of hedge funds are based on a misperception of the effectiveness of financial regulations, perhaps coupled with a lack of understanding of the positive contribution of hedge funds to the financial system.

There are real concerns about consumer protection following from the expansion of the consumer base. However, it would be misguided to relax accreditation criteria. A more important issue is the investment of regulated institutions, in particular pension funds, in hedge funds. Since such institutions to enjoy direct or indirect government protection, the investment in hedge funds has to be regulated. However, such regulations are best implemented on the demand side by the pension fund regulator, rather than by directly regulating the hedge fund advisors themselves.

Hedge funds provide considerable benefits, not only to their investors and advisors, but more importantly to the economy at large by facilitating price discovery, market efficiency, diversification, and by being potentially able to put a floor under a crisis, a function not easily implemented by regulated institutions due to a minimum capital ratios, relative performance evaluation and other considerations.

It would however be imprudent to leave hedge fund advisors completely unregulated since the failure of a systematically important hedge fund has the potential to create such uncertainty as to impede trading and in a worst case scenario cause a significant damage to the real economy.

These issues cannot be addressed by standard regulatory methodology such as disclosure and activity restrictions. Indeed, supervisors would be well advised to leave the hedge fund sector unregulated in their normal day-to-day activities. However, the regulator needs to have the power to resolve the informational uncertainty caused by the failure of systematically important hedge funds. Prime brokers and other client banks would in such a scenario have a de facto or a de jure obligation to participate in the expedient removal of the uncertainty.

But all the while we have talks about the negative nature of such funds; we also see a rapid increase in the amount of such funds entering into India. In fact the growth of FIIs and hedge funds is very much synonymous with the growth of our GDP with correlation factor of 0.98 and 0.97 respectively. 

Introduction

1. Hedge Funds:

Hedge funds, including fund of funds, are unregistered private investment partnerships, funds or pools that may invest and trade in many different markets, strategies and instruments (including securities, non-securities and derivatives) and are not subject to the same regulatory requirements as mutual funds.

Hedge funds today may or may not utilize the hedging and arbitrage strategies that hedge funds historically employed, and many engage in relatively traditional, long only equity