Strip away the mystique and a hedge fund is a pooled investment vehicle, organized as a private partnership rather than a registered mutual fund, that is permitted to do three things an ordinary long-only fund mostly cannot: borrow against its assets (leverage), sell securities it does not own (shorting), and use derivatives for more than incidental hedging. Those three tools are not incidental features, they are the entire reason the vehicle exists in its own legal category. A long-only equity fund's return is, almost by construction, mostly beta: the market's return, scaled by how fully invested the fund is. A hedge fund's pitch, not always delivered, and that gap is most of what this module is about, is that its extra toolkit lets it deliver alpha: return that does not simply scale with the market, because shorting lets it profit when something falls, leverage lets it scale a high-conviction, low-volatility trade up to a meaningful return, and derivatives let it isolate a single risk (a spread, a rate, a volatility level) instead of buying a whole company. Everything that follows, five strategy families, a fee structure, and a set of structural terms, is the machinery built around that toolkit.
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How are hedge funds regulated in the US and India?
The regulatory wrapper. In the United States, a hedge fund is typically organized to avoid registering as an "investment company" under the Investment Company Act of 1940 by fitting one of two exemptions: Section 3(c)(1), which caps the fund at 100 beneficial owners, or Section 3(c)(7), which permits an unlimited number of investors provided every one of them is a "qualified purchaser", a materially higher wealth bar than the "accredited investor" standard used elsewhere in private markets (check the current dollar thresholds against the SEC's own rule text). Separately, the fund's investment adviser (the management company) generally must register with the SEC under the Investment Advisers Act of 1940 once it manages roughly $150 million or more of private-fund assets in the US; below that, it may qualify as an exempt reporting adviser, filing an abbreviated Form ADV but not the full brochure (check the current threshold, which is set by SEC rule and has moved before). Registered advisers file Form ADV Part 2A (the "brochure"), a real, public, free primary source that discloses actual fee terms, conflicts of interest, and disciplinary history, and, above a size threshold, Form PF, a systemic-risk filing the SEC does not make public. India has no separate "hedge fund" registration category; the closest analogue is a SEBI-registered Category III Alternative Investment Fund (AIF) under the SEBI (Alternative Investment Funds) Regulations, 2012, the AIF category permitted to run complex or leveraged strategies, open- or closed-ended. SEBI circulars cap Category III leverage at roughly 2× NAV (about 200% gross exposure), with anything beyond that requiring enhanced disclosure and explicit investor consent (check the current circular). A newer wrinkle worth knowing: India's GIFT City International Financial Services Centre, regulated by the IFSCA, now lets India host offshore-style fund structures (including master-feeder arrangements) onshore, in a separate regulatory and tax regime from the rest of India (check the current IFSCA fund regulations).