Hedge funds are expected to play a bigger role in the Indian stock markets in 2003.
With tighter US hedge fund norms, lack of confidence in the dollar and fewer short-term trading opportunities, a section of hedge funds is set to divert their activities to emerging markets such as India, analysts said.
"Many new hedge funds are in talks with our US office to enter Indian," a source at a globally known futures brokerage house said. While other foreign brokerage houses are also in talks with various US-based hedge funds, none of them divulged the names of their clients.
It makes sense for hedge funds to enter the Indian cash and derivatives markets because of the inherent nature of the investment strategy of these funds, a fund manager said.
"Basically hedge funds are on look out for markets which have good volatility and price anomalies. India has both these qualities," said Jignesh Shah, strategist, ASK RJ Investment Management.
The US has recently introduced a norm which asks hedge funds that are based offshore to register themselves with the US Treasury Department's Financial Crimes Enforcement Network (if they have investments of more than $1 million and have US clients or are organised or sponsored by someone in the US).
The current upward trend in the domestic market has been aided by hedge funds and not the regular and long-term foreign institutional investors.
Also, institutional investors have participated through brokers' participatory/ promissory notes, pointed out a source in a brokerage.
A hedge fund is one which can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk.
In India hedge funds which qualify as 'absolute funds' officially are registered with the Securities and Exchange Board of India directly and operate in the country in their own names.
However, pure hedge funds operate in India through the FII sub-account and participatory note route, foreign fund managers said.
Given the good performance of the Indian market in the current quarter and the stronger rupee, it could attract heightened interest.
Even a drop in confidence in the US greenback will intensify money flow into emerging markets.
The delayed regulation over settling of trades in underlying securities in equity derivatives is expected to happen in 2003, providing a big opportunity and not just cash in the Indian derivatives trading.
"FIIs have been given permission to trade in equity derivatives recently. Moreover, the settlement in underlying shares makes it attractive for such investors as they can take leveraged positions at low cost and also manage to get the shares after a definite time frame," a broker said.
Though there are no official estimates available on the amount of investments in the Indian stock markets by hedge funds, the FII industry guestimate pegs it at around 20 per cent of the total FII investment in India.
Till December 22, as per Sebi data, the net FIIs inflow in India in the current calendar year is Rs 3,412.2 crore (Rs 34.122 billion).
There are world-renowned investment houses such as Goldman Sachs and Van Hedge Fund Advisors International Inc having hedge funds to substantial investors in the US and abroad, over and above other regular funds.
Also, there are others such as Sloane Robinson Investment Management, Kingdon, Faqrralone Capital, Oak Tree, Wessex and Bayer Alden active in hedge funds.
Generally, the most investment savvy hedge funds in the emerging markets operate through tax havens. Offshore hedge funds usually are mutual fund companies that are domiciled in tax havens -- Mauritius in the case of India.
However, with the recent Indian treaty with Mauritius on sharing information on the capital markets, the hedge funds may route their investments through other destinations.