INSTITUTE OF MANAGEMENT AND COMPUTER STUDIES (IMCOST), THANE

Analytical study - HEDGE FUNDS

Submitted for the partial fulfillment of the requirements for the degree of

MASTERS IN MANAGENENT STUDIES (FINANCE)

Submitted by

MS. IYER MANJULA SANKARAN ROLL NO : MS1011019

Under the Guidence of

Mr. ANIL MATKAR (PROFFESOR IMCOST)

Final Year Research Report On

HEDGE FUNDS

Submitted for the partial fulfillment of the requirements for the degree of

MASTERS IN MANAGENENT STUDIES (FINANCE)

SUBMITTED BY

MS. IYER MANJULA SANKARAN ROLL NO : MS1011019

PROJECT GUIDE PROF. Mr. ANIL MATKAR

INSTITUTE OF MANAGEMENT AND COMPUTER STUDIES (IMCOST) THANE (W) UNIVERSITY OF MUMBAI 2010 - 2012

CERTIFICATE

This is to certify that the project entitled Hedge Funds submitted in March 2012 to IMCOST - Institute of Management and Computer studies, Mumbai by

Ms. Manjula Sankaran Roll No: 1011019 MMS Finance in partial fulfillment on the requirement of the award of the degree of Master of Management Studies (M.M.S.) affiliated to the University of Mumbai for the batch of 2010-2012

Prof. Anil Matkar

(Project Guide)

Prof. Deshmukh
(Director General)

ACKNOWLWDGEMENT

This is to express my earnest gratitude and extreme joy at being bestowed with an opportunity to get an interesting and informative project. It is difficult to thank all the people who have helped me in completion of project, but I would avail this opportunity to express my profound gratitude and indebtness to the following people.

I am extremely grateful to my project guide and co-coordinator Prof. ANIL MATKAR who has given me an opportunity to work on such an interesting project. He proved to be a constant source of inspiration to me and provided constructive comments on how to make this report better. Credit also goes to library staff that helped me in the course of research. Moreover, to my friends whose constant encouragement kept me in good stead.

Finally, my deepest regards for the Finance faculty at IMCOST for strengthening my fundamentals concept in finance, which helped me successfully complete the project.

EXECUTIVE SUMMARY

The Title of the project is Hedge Funds. The main objective of the study is to understand the hedge funds as a whole and to gain detailed understanding of the various strategies used for hedging. The report is basically divided into three parts. The first part of the study involves a detailed study of the origin, history and explanation of hedge funds. It also includes the main points of differences between hedge funds and mutual funds. The second part of study consists of a detailed explanation of various hedging strategies, like convertible bond arbitrage, distressed securities investing, macro investing, etc. to name a few. The final part of the report deals with general information on hedge funds like their benefits, risks involved, etc. It also includes information on evaluation of performance of hedge funds and about hedge fund administrators. To conclude one can say that the hedge funds as an asset class have successfully lured High Net worth Individuals (HNIs) on a scale hardly imaginable five years ago. The amount of money pouring into hedge funds has increased and will keep increasing many fold in the years to come. In spite of the many shortcomings, investing in hedge funds has suddenly become a beehive of activity in establishing hedge funds, simply because it is the in thing at the moment.

Table of Contents

Sr. No.
1 INTRODUCTION

Particulars

Page No
1 3 4 5 11 14 18 20 23 27 33 39 40 42

1.1 Origin Of Hedge Funds A Brief History 1.2 Definition 1.3 What Are Hedge Funds? 1.4 Hedge Funds Vs. Mutual Funds 2. 3. RESEARCH METHODOLOGY THE KINGDOM OF HEDGE FUNDS STRATEGIES 3.1 Convertible Bond Arbitrage 3.2 Merger Arbitrage 4. 5. GLOBAL MACRO INVESTING MARKET NEUTRAL LONG/SHORT EQUITY TRADING 5.1 What is a Fund of Hedge Funds? 5.2 Fund Of Funds Versus Hedge Funds 6. BENEFITS OF HEDGE FUNDS

6.1 RISKS IN HEDGE FUNDS 6.2 THE IMPACT OF HEDGE FUNDS ON FINANCIAL MARKETS 7. 8. 9. HEDGE FUND PERFORMANCE Finding and recommendation BIBLIOGRAPHY

44 45

50 55 59

TABLE OF CHARTS AND GRAPHS

Sr. No. 1. 2. 3. 4. 5. 6.

Particulars Global Hedge Funds Assets under Management Estimated number of Global Hedge Funds Illustration on Convertible Bond Arbitrage Illustration on Merger Arbitrage Allocation of hedge funds as on 1.1.2010 Hedge Funds and Mutual Funds Returns in Falling Equity Markets

Page No 9 10 21 24 37 53