Crypto Hedge Funds: Are we ready for it?
- Team ThinkBizz
- Aug 11, 2020
- 5 min read
Imagine this: you wake in the swimming pool with no water. The pool is money-packed. Your account currently has a balance of a billion rupees. How does that make you feel? Now you are on the horns of a dilemma, either to splurge the riches or to be frugal and invest it in the stock market. Spoiler alert! You are a risk-averse investor and stepped into the world of the stock market. The bet is on crypto hedge funds. Wait a sec, but what are they?
Before learning the ropes of crypto hedge funds, let's destroy the relationship amongst them and then we’ll play as the cupid. ”Crypto” denotes cryptocurrency which means virtual money. ”Hedge” is a way of protecting oneself against financial loss or other adverse circumstances. ”Fund” means the accumulation of different sums of money which are a part of a professional investment. Crypto-hedge funds are investment funds which collate funds (pool capital in financial terms) from different investors into a group of assets. The cornerstone of crypto-hedge funds is either on cryptocurrencies or other digital assets.
Many of the amateur investors are having reservations between mutual funds and hedge funds. Unfortunately, hedge funds and mutual funds have differences amongst them like Harry Potter and Draco Malfoy. Mutual Fund is a platform where retail investors invest with limited investments. The limited amount required for investing in mutual funds is Rs. 100 with the help of SIP (systematic investment plan). Isn't it affordable? On the contrary, the minimum investment required for investing in hedge funds is a whopping 7.5 crore rupees, only from an accredited investor. Beyond any possible shadow of a doubt, that might've raised your eyebrow.
The investors investing in the hedge are rolling in money. Their relationship with the hedge fund managers is discreet to an extent. Unlike mutual funds, hedge funds are not part of public advertisement. They are a part of a private conversation between managers and investors with roof-blasting net worth.
Investing in crypto-hedge funds has a lot of advantages. It cannot fall under censorship and is resistant to seizure. The reason for investing in these funds is not just because there's a semantic evasion of tax from billionaires; these investors want to store their wealth securely in a way that no single judge could freeze all of their assets. For instance, Amazon” does not want their entire global business operation to shut down by one judge in Seattle. These investments though not being a part of regulations but they are under endless examination.
Bar graph showing that the number of crypto hedge funds has skyrocketed since the beginning of 2017.
Just like robbing the Royal Mint of Spain was impossible without The Professor, hedge funds would not be perfect without their managers. Their strategies are El perfecto. They provide their clients with the best returns and stockpile their wealth. Wait a sec, why do they do so? Reason being, in the world of hedge funds, there is a country which is known as ”2 to 20”. Heh? A name of that sort? 2 to 20 is the vice country of hedge funds. In this policy, the client has to praise his manager by giving him 2% of the total profit, provided if the return is less than 5% (or lesser). What if more? Then the client has to praise him with a whopping 20% as the management fee. Goodness, gracious! That's insane! There’s more to come. They use leverage (an investment strategy using borrowed capital), hoping for uncertain returns. Hedge funds invest in the market irrespective of the conditions of the market. The base of hedge funds is speculation. The strategic approach of hedge funds is commendable but speculative. Hence, hedge funds are like a coin, having a characteristic to turn either side. The result might be detrimental or benign.
Coins and crypto-hedge funds are the same. They have the same qualities, different sides with a different meaning. Hedge funds are a mixture of pros and cons. They go hand-in-hand and hate each other like Indian saas and bahu. Talking about our daily soaps, we often watch serials filled with court cases. On 4th March 2020, The Supreme Court of India finally ruled on the case against the banking ban by the Reserve Bank of India. The court held that the RBI circular which places a banking ban on the crypto industry is unconstitutional. A day that will be a part of the banking revolution in golden alphabets. Even though the crypto industry had a triumph over RBI, in this case, the question that resides in every crypto-fan Indian; Are the Indians ready for investing in the crypto hedge funds?
The Indian Banking sector has a lot of regulations to follow. From minimum capital requirements to the interest rate, everything is under scrutiny. RBI has levied laws on every end of the street. Deviating away from the path which RBI has ordered, will lead to ramifications.
Having rigid regulations, RBI in its circular stated that cryptocurrency is an illegal tender. Bitcoin, Ethereum, Litecoin are platforms where an investor invests. Many of the investors present in the "grey area"(not under regulations) of India, invest in cryptocurrencies and enjoy hefty returns. Regardless of the return on investments, these investors have nightmares that they might get caught.
In India, leverage is a poison. The interest upon loan is 11%. As in hedge funds ROI is speculative, a loss in investment can shatter the dreams of investors. Correspondingly, when hedge fund speculations are in jeopardy, they pull out the card up their sleeves. They perform a manoeuvre known as short selling. Short selling is when an investor sells shares that he does not own at the time of selling them. So what's up with that? According to the Indian Sale of Goods Act, 1930, there is a term: Nemo dat quod non-habet, it means that a person cannot sell goods or shares which are not his/her property. What if s/he does so? Then s/he is liable to compensate the other party.
Quadarch and Authorito capital might be two of the providential companies to hit the bullseye. The Return on Investment might be high, but they are strictly regulated. But why? What are they? Why are they treated like Vijay Mallya’s company? The Security and Exchange Board of India (SEBI) has levied special rules which investors have to follow.
· To be classified as a hedge fund, a fund needs to have a minimum corpus of INR 20 crore and a minimum investment of INR 1 crore by each investor.
· Only accredited investors are allowed to invest.
· Any kinds of speculative strategies will result in serious repercussions.
India is a country having riches and gold in its womb. After the pandemic misery, India needs to recover. Indians have to fill their empty pockets. This pandemic is the reason behind the swelling unemployment.
Just like Rome rising from their ruins, Indians need a comeback story. Cryptocurrency is a chicken that lays golden eggs. A population with a mind-blowing net worth can invest in crypto hedge funds. An increase in the circular flow of income might be the turning point; a post-pandemic comeback possibility increases.
Indians are ready for Crypto-hedge funds and cryptocurrencies. Hence, they filed a PIL for the abrogation of the RBI circular. Although India is at its inception in virtual money, Authorito Capital and Quadarch’s breakthrough is iconoclastic. There are thousands of mantras of having a prosperous investment in cryptocurrencies. Only a single mantra stands tall: Investment in crypto hedge funds without any speculative strategy is a boon otherwise it is a bane.
Zaid Khandwani
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