Indian hedge funds underperform in July, China funds fare better

Indian hedge funds lagged others during the budget-month, suggesting that they may have been caught on the wrong foot on how they were positioned for the first Union Budget of the new government. The fall in July was amid Budget disappointments, and selling by foreign portfolio investors after the introduction of higher taxes on their returns in Indian markets. 

The Eurekahedge India Hedge Fund Index was down 3.42 per cent, its worst performance in ten months. The last time the index did worse was in September 2018. The index showed a 7.7 per cent decline amidst headwinds including global trade tensions and a crisis in the non-banking financial company (NBFC) space. The liquidity conditions for NBFCs had worsened after key lender Infrastructure Leasing & Financial Services (IL&FS) failed to meet debt obligations. 

Foreign portfolio investors were net sellers by around $3 billion after the Budget announcement of the additional surcharge which took their highest effective tax rate to as high as 42.7 per cent. The government has since said that it will look to roll back the higher taxes. Doubts remained over whether the reversal would apply to domestic funds.

July's performance came in the midst of better returns elsewhere in the world. The Eurekahedge Hedge Fund Index rose 0.62 per cent. The MSCI ACWI index, which looks at equity returns in both developed and emerging markets, was up 0.83 per cent according to a Eurekahedge note on the July performance. American markets did well on the back of expectations of lower interest rates and the resumption of trade talks with China after persistent tensions. US Stock market indices were at all-time highs.

Asia did worse on the back of a trade dispute between Japan and South Korea, and poor economic data from India, according to the report. Assets under management (AUM) remained almost unchanged globally with a slowdown in redemptions in the second quarter (Q2).

“The global hedge fund industry AUM remained mostly flat as of July 2019 year-to-date. Final Q2 2019 net outflows figure stood at US$40.0 billion, as investor redemptions continued to slow down. Hedge fund managers recorded US$46.4 billion and US$94.7 billion of net outflows in Q1 2019 and Q4 2018 respectively,” said the report.

India gave worse returns in dollar terms. It was down 4.2 per cent. In comparison, the Eurekahedge Greater China Hedge Fund Index was down 0.7 per cent in the same period. India has outperformed China in only two months since January.  It was up 5.4 per cent compared to 2.1 per cent for China in March. Similarly, India showed a marginal (0.3 per cent) gain in May, compared to a 6.4 per cent loss for China in May.