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India-focused hedge funds on recovery path

Record second-highest returns in Asia this year, after Taiwan, fund managers say inflows set to rise

Palak Shah  |  Mumbai 

India-focused hedge funds could be on track to ending the year on a positive note. The Eureka Hedge Fund index for India-focused funds has risen 7.4 per cent so far this year, compared with a 25 per cent fall in 2011. September was the second-best month for India hedge funds, after January. In September, the index rose eight per cent, marginally outperforming key equity benchmarks.

The index is based on the net asset value (NAV) reported by 19 per cent of India hedge funds to Eureka. Experts say this is set to improve, as more data pours in. In September, the benchmark Sensex gained 7.6 per cent and the rupee rose 4.8 per cent against the dollar, aiding foreign investors who secured positions in India at lower levels this year.

Hedge funds focused on China rose about 3.3 per cent in September, based on the NAV of 19 per cent funds, and 3.9 per cent on a year-to-date (YTD) basis. In 2011, the China index of Eureka Hedge fell 13.17 per cent. This year, Korea and Japan funds gave negative returns. So far this year, Taiwan is the only Asian country where hedge funds have performed better than in India; the YTD Eureka Hedge index for Taiwan funds rose 13.9 per cent. The Eureka Emerging Market index for hedge funds rose about five per cent this year.

“These September returns would raise inflows to India hedge funds,” said Samir Arora of Singapore-based Helios Capital. He added though there were some inflows in India funds in the past few months, these were not on a big scale.

Region-wise year to date performance (%)
Taiwan 13.88
India 7.37
Greater China 3.88
Japan 0.01
Korea -1.21
Emerging markets 4.94
Source: Eureka Hedge

An analyst with Eureka Hedge said the Indian hedge fund sector had stagnated at $3-4 billion, as it had seen negative flows in 2011. This year, too, flows have been negative but not as significant as last year. So far this year, emerging market hedge funds have seen $2 billion of outflows, the analyst added.

The hedge fund sector, earlier overshadowed by launches of exchange-traded funds (ETFs), is back on the recovery path. Though the ETF structure is as vague as that of hedge funds, the latter has been criticised since 2008 for aggressive short-selling strategies that had pushed global to historical low levels.

“Even last year, hedge funds had outperformed ETFs by a massive margin. So, investors will realise where to put their money,” Arora said.

In 2010, while the Eureka index of India hedge funds fell 25 per cent, ETFs lost 40 per cent of their NAV (the Morgan Stanley India Index fell about 38 per cent and almost all India ETFs are pegged to this index; they also charge a fee of 1-1.5 per cent). Yet, while ETFs grew in number, many hedge fund managers had to close shop, as investors turned hostile and regulators became wary. Hedge funds provide absolute returns, and these have significantly outperformed underlying in the past couple of years, as globally, their investment theme was defensive.

Experts say in the past year, large macro hedge funds were set up in Asia. Together, these attracted $25 billion in the first few months this year. Most emerging market hedge funds are focused on equity, or play with an equity-investing mandate. Of these, 55 per cent are focused on equities and 12-14 per cent on commodities. Experts say the remaining are exposed to different asset classes.

Besides Helios Capital, India-focused offshore funds include Avatar Investment Manage-ment, India Deep Value Fund, HFG India Continuum Funds, Fair Value and Indea Capital Pte, among others.

First Published: Wed, October 10 2012. 00:17 IST