The assets under management for hedge funds based in India have grown faster than their foreign peers since they came into being in 2012. This was the year when the capital markets regulator, Securities and Exchange Board of India (Sebi), recognised hedge funds as a category for the first time.
The S&P BSE Sensex is up a little less than 80 per cent since the regulations were enacted, while the hedge fund assets have more than doubled. Interestingly, India-focused foreign hedge funds' assets are up only 44 per cent in the same period, according to data from hedge fund tracker Eurekahedge.
The faster growth of domestic players could also be on account of the difference in size of the foreign versus the India-based segment. The money managed by hedge funds which have a mandate to invest only in the Indian market scaled a multi-year peak in 2014. The total amount managed by such funds reached $3.45 billion. And, $3.06 bn of this came from funds based outside India. Local funds accounted for $392 million.
Local players have also tended to outperform their foreign peers. Their return in 2014 was 50.8 per cent. India-dedicated hedge funds based outside the country had a return of 44.19 per cent.
"Broadly, it definitely helps to have feet on the street. There is no substitute to be on the ground in the market that one invests in. That being said, information is widely available today, which allows for informed decision making from anywhere in the world. I would have to say there is a small edge to generate alpha by being present in the market one invests in," said Anuj Didwania, managing director, Redart Capital Advisors, which runs an Indian hedge fund.
The nature of participation so far might be the cause that the assets of local hedge funds are much lower than those of India-dedicated funds abroad. "Institutions don't invest in alternative assets (of which hedge funds are a part) in India. Globally, the biggest investors in hedge funds are not HNIs (wealthy individuals) but institutions like pension funds and endowments… therefore, the room to grow (in India) is very limited," added Didwania.
However, the interest does seem to be building. "There is some interest from corporate treasuries and family offices," said Vaibhav Sanghavi, managing director, Ambit Investment Advisors, which runs its own hedge fund. But there are plenty of kinks to be worked out before hedge funds can attract foreign capital.
"Foreign investment in Indian hedge funds, organised as trusts and LLPs (limited liability partnerships), require Foreign Investment Promotion Board approval, which generally has been challenging to obtain. In addition, there is a tax arbitrage in favour of offshore funds directly investing from favourable treaty jurisdictions, as compared to tax challenges and ambiguities for lndian hedge funds. These factors have deterred foreign investments in Indian hedge funds," said an official with one of the big four accounting firms.