Indian hedge funds get knocked down but get up again

December 12, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The fortunes of hedge funds focused on India continue to twist and turn, with many plots and subplots. After witnessing widespread losses and heavy redemptions in 2008, Indian hedge fund managers bounced back remarkably to post a 50 percent return in 2009. They continued their good form in 2010, delivering healthy gains of 12 percent during the year.

But in 2011, the managers witnessed losses amid declining markets and a depreciating rupee. At the end of that year, many managers expressed confidence in the underlying market for the following year and predicted gains for the rupee by mid-2012 — both these predictions came to pass. The Eurekahedge Indian Hedge Fund Index was up 13.13 percent in 2012, making it the strongest regional hedge fund mandate for the year. Some of the funds even witnessed asset inflows in 2012 and early 2013, a rarity for Indian hedge funds since the financial crisis.

As such, Indian hedge fund managers started this year with their tails up, armed with strong returns and positive global investor sentiment. The managers witnessed healthy returns in January, helped by a rally in underlying equities as foreign investors poured more cash into Indian stocks. And just when you thought the sector was out of the woods, the positive run ended — most managers witnessed losses in February and March, finishing the first quarter in the red.

Investor reaction to the 2013-14 Budget was not very supportive, given that it did not include significant infrastructure development announcements. The second quarter was worse as the rupee declined, further adding to market losses suffered by managers. July and August witnessed a continuation of the negative streak, as the Reserve Bank of India’s (RBI) measures to support the rupee further hurt investor sentiment.

A change of guard at the RBI resulted in confidence returning to the Indian market. To his credit, new governor Raghuram Rajan announced policy measures in September that immediately revived local financial markets. Further steam was added to the rally by global events and hedge funds, which had earlier indicated increasing their net exposure, rode the upside to deliver average gains of 7.3 percent in September and 5.4 percent in October.

The latest announcements by the government indicate greater policy action to support growth going forward. Additionally, the upcoming elections are expected to provide a further boost to the Indian markets.

In this environment, we expect India focused hedge funds to deliver stronger returns going forward. However, volatility will still be a concern. Part of this is due to the way shorting is achieved in the Indian market, via single stock futures, which invariably increases rupee exposure for dollar-based funds.

Over the last few years, most hedge fund investors looking for India exposure have allocated to pan-Asia funds to achieve diversification. This trend, however, is showing signs of change as we have witnessed new India-focused fund launches in 2012 and 2013. Some of the new launches have also attracted capital. In fact, the largest India-focused hedge fund in terms of assets under management was launched in 2013, showing that investors are still considering concentrated exposure to India.

Currently, total assets under management in India focused hedge funds are $3 billion, but we expect this to increase over the next two years through positive performance as well as some capital inflows.

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