The sharp decline in the rupee has hurt the performance of India-focused hedge funds. This year, they have been among the worst performers globally.
India-focused funds lost 17.8 per cent of their net asset value (NAV) till October, as against gains of 12.8 per cent in 2010, data from the hedge fund tracking firm, Eureka Hedge, showed. Compared to India, hedge funds focusing on other emerging markets, Europe and the US fell between three and 12 per cent.
The major loss for hedge funds came in August and September, when the Eureka Hedge India index fell 7.7 per cent and 6.7 per cent, respectively. The rupee in these two months fell as much as 11 per cent. “It is mainly the fall in currency that has hurt hedge funds the most. The stop-loss of large institutions got triggered when the rupee witnessed a sharp fall in August and September,” said a hedge fund manager.
However, analysts say India-focused hedge funds have done better, as the key equity indices, the Bombay Stock Exchange's Sensex and the S&P CNX Nifty of the National Stock Exchange, have fallen a little over 20 per cent in 2011 till October, in dollar terms. Both fell less than 15 per cent in 2011 till October in rupee terms. The BSE Mid-cap index fell 19 per cent and the BSE Small-cap index declined by 27 per cent this year till October.
The assets under management of these hedge funds have suffered as well. They stand at $3-4 billion now, down from $7.3 bn as of the end of 2007, said an analyst.
In October, India hedge funds gained 1.22 per cent in net asset value (NAV). However, it was based on reporting by a small number of funds, comprising 3.2 per cent of the whole. The majority of the funds would report their NAVs to Eureka Hedge by November 15-20.
Foreign institutional investors (FIIs), which poured $29.3 bn into the Indian equity market in 2010, have invested only a few million dollars this year. The FIIs were also net sellers in September.
The rupee depreciated by a litlle over eight per cent in September against the greenback and touched its lowest level in 28 months, as global risk aversion prompted investors to move into safer assets like the dollar and debt.
After Standard & Poor's downgrade of the US government's AAA-credit rating on August 2, the rupee depreciated around 12 per cent against the dollar. The Sensex has declined 10.7 per cent since then, while the Dollex-30 has lost nearly 20 per cent. For a fund managing $1 bn in India stocks, the fall in rupee value has meant a blow of Rs 600-700 crore since August.
Analysts say the sharp slide in rupee value hurts hedge funds as their existing investments see a sharp fall. However, investors bringing in fresh money stand to benefit, since the funds will be able to buy more stocks with less dollars. This happened during May 2008, when the spot rupee fell 4.5 per cent in a fortnight and FIIs had pumped in a little over Rs 700 crore. This saw the BSE Sensex moving up by 600 points to 17,350 on May 19, 2008, said the hedge fund manager.