Hedge fund is a type of securities fund and is subject to the same taxation rules as securities funds. Unlike the other investment funds, a hedge fund is managed by applying an investment strategy aiming to make a return by all means, without using any benchmark criteria, so that various investment instruments, especially derivatives, are used for it. There is no difference between hedge funds and securities funds in terms of assets allowed for their portfolios except for swap agreements and non-listed option agreements. However, unlike securities investment funds, hedge funds may perform short sale and securities margin trading transactions. Furthermore, bylaws of hedge funds can be written to ensure the open position to which a hedge fund will be exposed due to derivatives, its total open position and debt limit not to be subject to the portfolio limits stipulated in the Investment Funds Communique.
As in other types of fund, portfolio management companies must be careful for the assets added in hedge funds. By definition, hedge funds take very high risks to make very high returns. Therefore, hedge funds are allowed to trade such extremely risky products as swap, option and short sale. However, almost none of these products complies with the interest-free financing principles, so that the participation banks do not use them except for Treasury swap transactions. It is desirable not to make such derivatives products become widespread in the sector. Therefore, it is not possible for participation banks to establish hedge funds with unusable products. On the other hand, portfolio management companies may develop hedge funds by employing strategies different from the present market applications. For example, a hedge fund may be established with less risky lease certificates, participation accounts, share certificates and gold without being subject to any portfolio restriction. Forward transactions made by the participation banks to take risks or to hedge against risk may be made within a hedge fund too. Unlike futures transactions, forward transactions are not listed in the Stock Exchange, therefore the Capital Market Board imposes the restriction tat maximum 10% of a hedge fund may be invested in forward transactions.