SEBI today allowed hedge funds to invest in the commodity derivative market. Hedge fund managers can invest up to 10% of overall corpus in one underlying commodity.
Commodity derivative market comprises instruments such as gold, silver, crude oil, cooper, and so on.
Hedge funds fall under Category III of AIFs. These funds aim to generate short-term returns by employing diverse or complex trading strategies.
In a circular, SEBI said that the government had recommended allowing participation of institutional investors in commodity derivatives markets to improve the quality of price discovery in the commodity derivative market.
“Taking cognisance of the fact that participation by institutional investors would be conducive for the overall development of commodity derivative market. Based on the recommendations of the Commodity Derivatives Advisory Committee (CDAC) and feedback received from the market participants during the consultative process, it is now decided to allow the Category-III Alternative Investment Funds (AIFs) to participate in the commodity derivatives market,” SEBI said.
The capital markets regulator added that hedge funds could leverage to invest in commodity derivatives subject to maximum limit. Currently, hedge funds can invest up to 200% of their funds size by leveraging.
SEBI has clarified that hedge funds should give an exit option to existing investors by issuing disclosure through private placement. Such an option would not entail exit loads.
