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India-focused hedge funds on road to recovery

Post second best returns in Asia this year so far, fund managers say inflows will scale up

Palak Shah  |  Mumbai 

The India-focused hedge funds may well be on track to close the calendar year 2012 on a positive note. The Eureka Hedge Fund index for India focused funds is up nearly 7.4% so far this year compared to a 25% fall it witnessed in 2011. September has turned out to be the second best month for India hedge funds after January, as the Eureka index rose by 8% during the month and marginally outperformed the key equity benchmarks.

This is based on net asset value (NAV) reported by nearly 19% of India hedge funds to Eureka and the number may only improve as more data pours in, say experts. During September, the key equity benchmark index Sensex gained 7.6% and rupee shot up by 4.8% against the dollar, aiding foreign investors who took position in India at lower levels this year.

Comparatively, hedge funds focused on China rose nearly 3.3% in September, based on NAV by 19% funds, and 3.9% on a year to date (YTD) basis. The China index of Eureka Hedge had fallen 13.17% in 2011. This year, Korea and Japan funds have given negative return. Taiwan is the only country in Asia where hedge funds have better performed than India in 2012 so far. The YTD Eureka Hedge index for Taiwan funds is up 13.9%. However, India's economy is nearly five times larger than Taiwan. The Eureka Emerging Market index for hedge funds has gained nearly 5% this year.

"This September returns will push up inflows to India hedge funds," said Samir Arora of Singapore based Helios Capital. According to Arora, even though there were some inflows in India funds in past few months, they were not happening on too big a scale.

An analyst with Eureka Hedge said, the Indian hedge fund industry has stagnated at around $3 to $4 billion as they saw negative flows in 2011. In the current year too, flows have been negative but they are not as significant as last year. In 2012, the emerging market hedge funds have seen $ 2 billion in outflows so far, said the analyst.

The hedge fund industry that had got overshadowed by the pace Exchange Traded Fund (EFT) fund launches, is back on the recovery path. The ETF structure too is as vague as hedge funds but the latter had come under criticism post 2008 for aggressive short-selling strategies that had pushed global to historical low levels.

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

During 2010, while Eureka index of India hedge funds crashed by 25%, the ETFs lost nearly 40% of their NAV. This is based on the fact that Morgan Stanley India Index (MSCI) was down around 38% and all most all the India ETFs are pegged to this index. Further, they charge a fee of around 1-1.5%. Yet while, ETFs grew in number, many hedge fund managers had to close shop as investors turned hostile and regulators were more wary of them. Hedge funds provide absolute return and they have significantly outperformed underlying in the past couple of years as globally the investment theme for them was defensive.

Experts say, there have been some large macro hedge funds setting up over past one year in Asia. These together managed to attract $25 billion in first few months of 2012. Most emerging market hedge funds are focused on equity or play with an equity investing mandate. Among them 55% are purely focused on equities and 12-14% are focused only on commodities. The rest are somewhere in the middle with exposures to different asset classes, experts believe.

Apart from Helios Capital, some of the India focused off-shore funds include Avatar Investment Management, India Deep Value Fund, HFG India Continuum Funds, Fair Value, Indea Capital Pte, India Capital Fund, Monsoon Capital, Karma Capital Management, Atyant Capital and Atlantis India Opportunities Fund.

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First Published: Tue, October 09 2012. 18:20 IST