Hedge funds operating in India have scaled up their activity in recent months. They have reportedly pumped in over $1 billion (over Rs 4,650 crore) into the Indian market in 2003.
"Around 40-50 per cent of the overseas money flowing into the Indian market is through participatory notes and most of it is coming from hedge funds," said Dharmesh Mehta, head of equities with Enam Securities.
In 2003, foreign investors have pumped in $2.15 billion (Rs 10,188.30 crore) into the Indian equity markets.
Till last year, hedge fund inflows were around 20 per cent of the total foreign inflows, according to industry estimates.
In the Indian market, these funds are able to generate returns of around 13 per cent (annualised), while the S&P 500 has actually recorded a decline in returns.
Hedge funds are typically short-term funds that take advantage of the arbitrage opportunities in different markets and cover their exposure in one market by taking an opposing exposure in another. For instance, they could go long in a company in the US and short it in India.
In India, pure hedge funds operate indirectly since they do not wish to register with the market regulator.
They, therefore, issue participatory notes, which are like certificates for an underlying domestic security, to their clients who are interested in investing in the country, or they take the foreign institutional investor sub-account route.
Most of the leading foreign brokerage houses operating here conduct deals on behalf of the hedge funds.
Although typically hedge funds are short term, there are some funds that stay invested for a longer timeframe.
The market is, in fact, jittery over the increased exposure that hedge funds are taking in equities. According to a fund manager, if they pull out the market will collapse.
According to market sources, a host of new hedge funds has entered the market. They all operate out of the US, while the clients are mostly in Hong Kong and Singapore.
India offers a unique opportunity for hedge funds in the sense that there is a lot of volatility coupled with substantial price anomalies, "ideal conditions for the hedge funds to operate in," according to a dealer.
Of the 40-50 hedge funds operating in the country the more prominent are Kingdon, Standard Pacific, Tiger Management, Faqrralone Capital , and Bayer Alden.
While on the surface there might be little to distinguish a hedge fund from a bona fide foreign institutional investor, market players differentiate on their composition, regulatory and prudential requirements they comply with and investment motives.
The most vital difference is that hedge funds take investments from a few high net-worth individuals while an institutional investor is a proper institution, operating according to regulatory norms.
Incidentally, the size of the hedge fund universe is estimated at an astounding $600 billion.
Torrential downpour
- Hedge funds have been able to generate returns of around 13% (annualised), while the S&P 500 has recorded a decline in returns
- Pure hedge funds operate indirectly in India since they do not wish to register with the market regulator
- The market is jittery over the increased exposure of hedge funds. According to a fund manager, if the funds pull out, the market may collapse
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