InvestorQ : Why are taxes to be paid on hedge funds?
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Why are taxes to be paid on hedge funds?

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1 month ago
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Hedge funds are investment vehicles that pool money from multiple investors and invest them according to a strategy. These funds can be Limited Liability Partnerships (LLP) or Limited Companies formed by either a money manager or Registered Investment Advisor (RIA). Hedge funds were initially formed to hold both long and short stock positions to hedge risk. Therefore, hedge fund investors would earn money no matter how the market goes.

However, over a period of time, they include all types of capital investments. Hedge funds tend to offer a higher return, however, at a higher risk. These funds fall under Alternative Investment Funds Category III. Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 regulates these funds. The minimum investment in a hedge fund per investor is INR 1 crore. Also, it would need a minimum corpus of INR 20 crores to start the fund. The hedge fund expense ratio consists of management fee and performance-based fee ratio. The management fee is usually around 2%, and the performance fee is anywhere between 10%-20%.

SEBI wants to discourage unscrupulous and suspicious activity via the hedge fund route, especially from off-shore accounts. Further, a hedge fund investor has to have a very high-risk threshold in order to invest in hedge funds. Hence, hedge funds are taxed very stringently in the country.
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