Exploring The Difference Between Pms And Hedge Funds
Introduction:
When it comes to investing your hard-earned money, the decision between Portfolio Management Services (PMS) and hedge funds can be challenging. Both operate in distinct ways with unique characteristics and cater to different types of investors. This article delves into the key differences between PMS and hedge funds to help you understand which might be a better fit for your investment goals. Keep reading.
Understanding Portfolio Management Services (PMS)
Portfolio Management Services (PMS) involves the professional management of portfolios based on individual clients’ investment preferences, risk tolerance, and financial goals. Each portfolio is customised, and investors directly own the underlying securities. Portfolio management services are specifically designed for high-net-worth Individuals (HNIs) who find it difficult to manage investment portfolios on their own.
There are two types of portfolio management services:
1. Discretionary PMS
The portfolio manager has full control over investment decisions. They have the authorisation to make changes in the portfolio without getting permission from the client.
2. Non-discretionary PMS
The investor or the client is actively involved in the decision-making process. The portfolio manager makes recommendations, but the final decision is taken only upon the client’s approval.
Key features of PMS
Below are the salient features of portfolio management services:
- PMS offers highly customised investment strategies. These strategies are tailor-made based on the client’s investment preferences, risk appetite, and financial goals.
- Investors can see the individual securities in their portfolios and track their portfolio performance regularly
- Portfolio managers can invest in a wide range of asset classes, including equities, bonds, and derivatives
Understanding Hedge Funds
Hedge funds are pooled investment funds that employ various strategies to earn active returns for their investors. These strategies can be quite complex and involve leverage, derivatives, and short selling. Hedge funds are typically open to accredited investors due to their higher risk profile and regulatory requirements.
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Below are the key features of hedge funds:
- Hedge funds have the potential to provide higher returns compared to traditional investments, though with higher risk
- Hedge funds operate with fewer restrictions, allowing for greater flexibility in investment choices
- Investors typically do not know the specific securities held by the fund, as hedge funds are less transparent about their investments
- Hedge funds often pursue aggressive investment strategies aiming for high returns, including long/short equity, market neutral, arbitrage, and global macro strategies
PMS vs. Hedge Funds
Keep reading to explore the differences between PMS and hedge funds based on various parameters:
- Risk and return
PMS generally aims to generate steady and moderate returns, focusing on long-term wealth creation. Risk levels are managed according to the investor profile, and there’s a significant emphasis on capital preservation.
Hedge funds, on the other hand, aim for high returns through aggressive strategies, accepting a higher level of risk. As an investor, you should prepare for significant volatility and the possibility of substantial losses.
- Liquidity
PMS offers better liquidity compared to hedge funds. You can enter or exit their positions relatively easily, subject to market conditions. On the other hand, hedge funds often have lock-in periods and redemption restrictions. It means that you might have to wait for a specific period to withdraw your funds.
- Fees and costs
Typically, PMS charges a management fee based on a percentage of the assets under management (AUM). Some PMS providers may also charge a performance-based fee if the portfolio exceeds a predefined benchmark.
However, hedge funds may charge a fixed percentage of the AUM and the profits. The fees can be significantly higher as compared to PMS.
- Regulation and transparency
PMS is heavily regulated by financial authorities in each country. For instance, in India, PMS is regulated by the Securities and Exchange Board of India (SEBI). These regulations ensure a high level of transparency and investor protection.
Hedge funds are subject to fewer regulations than PMS, allowing them more flexibility in their operations.
- Minimum investment requirement
PMS typically requires a significant minimum investment, but it is generally lower than hedge funds. Hedge funds, on the other hand, often have very high minimum investment requirements.
What should you choose?
The decision between PMS and hedge funds boils down to your financial goals, risk tolerance, and investment horizon. You can choose PMS if you prefer a customised approach to investing and seek moderate returns with low risk. However, you can opt for hedge funds if you are willing to take on higher risk for potentially higher returns and have significant capital to invest.
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