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India-specific hedge funds among top global performers

Date: Monday, August 31, 2009
Author: Hindu Business Line.com

Hedge funds investing in India are now among the top performers globally, after languishing at the bottom of the charts, hit by poor returns and outflows in 2008. Inflows into India specific hedge funds, however, continue to be muted.

The 37-per-cent gain in Eurekahedge India index, disseminated by Eurekahedge (a leading data provider on alternative investments), makes it the top gainer among regional hedge fund indices until July 2009.

Eastern Europe and Russian region and Greater China vie for the second position with 33 per cent return. Hedge fund returns in developed markets such as Europe and North America are relatively muted between 12 and 14 per cent, dragging the global returns down to 12 per cent.

That the Indian hedge funds turned in one of the worst performances in 2008, down 52 per cent, could partially account for this out-performance, as it made for a low base effect.

The asset base last year was eroded significantly following a surge in outflows in the last quarter of 2008.

Interestingly, hedge-funds investing in Eastern Europe and Russia, which are among the out-performers this calendar year, also turned in a woeful performance in 2008.

Monthly performance

The Eurekahedge India index started 2009 on a sober note registering a monthly decline in January and February.

The spike came in May when the index rose 23 per cent.

This coincided with the 34 per cent rally in BSE 500 when sentiment turned extremely bullish after the UPA Government was voted back to power. Hedge funds are aggressively managed investment pools that cater to the super-rich and employ a wide array of advanced investment strategies to generate high returns. But hedge funds in India are predominantly focused on equity (long-short equity and multi-strategy funds).

This would explain their linkages to stock market movements.

Long-short equity funds across regions have turned in the best performance in July reflecting the sharp bounce in equity prices world-wide.

Asset flows

Despite their recent returns, fund flows into hedge funds continue to be well below the level seen in the bull markets a couple of years ago. Though outflows have tapered off, there is only a marginal inflow witnessed over the last three months.

Says a spokesperson for Eurekahedge, “Net redemption in India is expected to be in line with those of broader Asian hedge funds – net outflows of around 15 to 20 per cent between January and April, and flat to positive asset flows thereafter.

However, we’ve seen a lot of capital appreciation from positive returns post-March, which diluted the impact of the redemptions on the total assets of the Indian hedge fund universe.”

Monsoon impact

Although Indian equities have been meandering aimlessly over the last two months due to the worries on the monsoon front, hedge fund managers are not unduly worried on that score.

“Most investors would only allocate a very small portion of their capital to India-dedicated hedge funds – a case of not wanting to put all your eggs in one basket (country/region). So, we don’t expect scanty rainfall to impact asset flows into these investment vehicles. However, we do expect Indian hedge fund managers to adopt a more cautious stance to sectors that may potentially be impacted by the rains,” adds Eurekahedge.