Indian hedge funds beat their peers in other emerging markets in 2020

Outperformance in three of the last four months has helped Indian hedge funds beat their peers in other emerging markets in 2020.

The Eurekahedge India Hedge Fund Index was up 6.41 per cent for November. The Eurekahedge Emerging Markets Hedge Fund Index was up 4.93 per cent in comparison. The year-to-date returns are 13.33 per cent for Indian funds, compared to 11.66 per cent for emerging market funds overall.  

This follows a period of muted performance after the government announced the lockdown. Indian hedge fund returns were lower than returns for the overall emerging market in May, June, and July. Returns were higher in all the months since then, barring October. Hedge funds are investment vehicles for the wealthy which often make use of sophisticated strategies to beat the market.

There may be some differences among various kinds of hedge funds, according to portfolio management services (PMS) and alternative investment fund (AIF) industry tracker PMS Bazaar founder-director Daniel G M. Long-only hedge funds typically do better when the markets are on the rise, he said. They bet on rising stock prices, unlike long-short funds, which look to profit when the market is falling. The S&P BSE Sensex hit an all-time high of 46,704.97 on Wednesday. Portfolio managers may seek some safety after the rally, which has seen an 82.2 per cent gain in the index from its March lows, according to Daniel G M.

“They may try to create some cash positions,” he said.

“They are actually booking profits,” agreed Swapnil Pawar, chairman of alternate asset management firm Scient Capital, and said many in the market feel that the rally may be overdone. Those running long-only funds may have limited ability to take positions reflecting this view relative to their long-short peers, many of whom are erring on the side of caution, according to Pawar. Many long-only funds believe that decisions to sit on cash should be left to their investors, who are free to withdraw if they wish to lower their allocation after the surge in the markets.

The outperformance comes on the back of a rebounding economy. Gross domestic product (GDP) growth could accelerate to 13 per cent for the next financial year amid signs of economic activity coming back to levels seen before the Covid-19 pandemic, according to the ‘2021 Outlook: India — Growth Recovery’ report authored by Jefferies India equity analysts Mahesh Nandurkar and Abhinav Sinha. “The Indian economic growth has recovered smartly…as the world’s strictest lockdown gave way to ‘unlock’ policies.” 

Company earnings are expected to be flat this year, while it is estimated to show a 30 per cent rise in the next year, according to the report. A recovery in housing aided by lower interest rates may also help provide an impetus to fresh capital expenditure (capex), according to the report.

“Should the housing cycle recovery take hold, it should drive several industries along with it given the deep linkages and also mark a turn for India's overall capex cycle,” it said.