Two fast growing emerging markets, India and China are keenly observed for new
investment propositions, particularly investment
in hedge funds. Presence of systematic institutional framework for hedging,
regulatory factors, a well-developed capital economy, liberalized stable
economy, rapid reforms, democratic set-up, good information disclosure
standards, better return on capital have rather favored India score over China
as a superior place for investment in hedge funds.
Investment in hedge funds is a cynosure of interest for
sophisticated investors, wealthy individuals or families and big institutions.
They are class of investors who believe in the finance mantra - higher risk,
higher opportunity investments and higher rewards. Yes, investment in India focused
hedge funds - for those with an appetite for risks, most willing to take risks
in anticipation of explosive reward. Investment in hedge funds in India has been
gaining momentum post 2001-2002. To invest in hedge funds in India, you need
to first understand what they are and how it works.
Hedge funds basics
Investment fund: Money is
collected from a group of people and invested. Foreign Institutional Investors
(FIIs), Non-Resident Indians (NRIs) and persons of Indian Origin (PIOs) invest
in securities in primary and secondary markets in shares, bonds, commodities,
With a minimum investment limit: The investors are high net worth individuals. Exclusively favoring
the crème de la crème, the usual minimum
investment amount is US$ 1, 000,000/ USD 1 million.
Returns through use of high-risk techniques and strategies: Hedge funds prefer to remain secluded
and untouched by the market environment. Hedge
funds seek absolute returns irrespective of how the markets behave. The
fluctuations in the market are not to affect the absolute returns aimed
at. For this, single or multi high-risk
techniques and strategies are adopted to generate the returns.
- Investment in emerging markets with features such as
high inflation, volatile market with signs of future growth. Purely
defined by geography, investment may be in equities, bonds or currencies.
- Short-selling strategy i.e. selling shares without
actually owning them with a proposition to buy back at a future date at a
price lower than selling price - all with an expectation that the share
price will drop.
- Adopting arbitrage strategy such as statistical arb, merger arb, fixed-income
arb, capital structure arb, volatility arb and CB arb are the most
well-known hedge fund arbitrage strategies.
- Event driven situation strategy is adopted when mergers, hostile takeovers,
reorganizations, bankruptcies or leveraged buy outs happen irrespective of
market situation. The strategy involves buying stock in company being
acquired and simultaneously selling the stock in the acquirer company.
- Leverage strategy is by means of using borrowed funds at a fixed rate of interest
and investing to earn a greater rate of of return than the cost of
interest. The borrowed funds are to supplement existing funds. The
investor hopes that the returns will exceed borrowing costs.
- Distressed security buying strategy which involves buying equity, debt at deep
discounts of companies in distress. These are companies on the verge of
entering a financial distress or about to exit or trying to avoid
bankruptcy. If the company reorganizes and performs well, the positive
returns benefit the hedge fund investor.
- Multi-strategy approach which involves deploying various strategies simultaneously for
long-term or short-term results.
- Same sector investment strategy, investing in long or short term equities of
the same sector in the markets. Selection is based on various factors such
as the sector, term of investment, growth or changes expected etc.
Hedge funds in India
Financial experts opine that India has
tremendous potential for attracting global investments in hedge funds. The
early entrants into the Indian markets have recorded encouraging returns which
in turn attracted other hedge fund players to step in. Renaissance
Technologies, Vikram Pandit-founded Old Lane, DE Shaw,
Och-Ziff Capital Management are some reputed international hedge funds firms in
India. Here is a list of hedge funds operating in India.
- Indea Capital Pte Ltd.
- India Capital Fund.
- India Deep Value Fund
- Absolute India Fund (AIF)
- Fair Value
- Naissance Jaipur (India) Fund
- Avatar Investment Management
- Passport India Fund
- HFG India Continuum Fund
- Monsoon Capital Equity Value Fund
- Karma Capital Management, LLC
- Vasishta South Asia Fund Limited
- Atyant Capital
- Atlantis India Opportunities Fund
Hedge funds in India Glossary
Inception date: The date on which the
fund starts trading.
Investment manager: The prospectus ought to provide details about the
investment manager whether an individual or a group of persons who would
oversee investment strategies. The investment manager may also play the roles
of fund manager, investment advisor or sponsor. Investment manager provides
clarification to the investor on any matter related to hedge fund investment.
Fund administrator: Primarily responsible for processing investor's
subscriptions and redemption, the fund administrator calculates the value of
investor's holding too. Fund administrator may be an individual or a group of
Custodian: The financial entity that holds hedge fund
assets. This includes cash in the fund as well as securities.
Prime broker: There can be overlapping of roles and
responsibilities with fund administrators. But prime brokers bring in
investment and operational perspective to hedge funds. Prime brokers help fund manager or investment
manager to decide on allocation of investment funds to different brokers.
Transaction broker: All investment activities are executed through
the transaction broker.
Typical hedge fund investment
- Investor chooses and decides hedge fund investment
- Subscription amount is paid to the custodian.
- Custodian confirms receipt of payment to fund administrator.
- Fund administrator instructs issue of share to investor.
- Fund administrator issues reports on hedge fund performance.
- Investment manager instructs custodian to move funds to prime broker for investment in
- During the process the prime broker and custodian are in direct contact with fund
Guide to investing in hedge funds in India
Prior to finalizing investment,
take couple of months to know about the hedge fund industry in India. The age
of hedge fund industry, the key players, their worth, the operational risks,
the pros and cons of investing in hedge funds etc
Identify potential hedge funds,
refer commercial directories or databases. Account for your investment goals,
risk tolerance level, amount allocated for investment.
Get to understand the ground
realities of regulatory factors, its implications; how business is run in India
Read blogs, financial magazines,
websites, news articles, white papers on hedge funds in India. Talk to personnel;
preferably interact with hedge fund managers involved with hedge fund
investments and those who have already invested in hedge funds.
Notice annual events like Hedge
funds world India
to gain an assessment of the burgeoning Indian hedge
Approach wealth manager in wealth
management companies, securities broker or licensed investment consultant for
advice on hedge fund investments in India.
Understand terms related to hedge
funds, remittance, management fee and performance fee, withdrawal and
Check the pros and cons of
long-term hedge funds vs. short-term hedge funds.
Ensure your activities are that of
an accredited investor (with a net worth of more than $1
Involve financial advisor in the
process of investing in hedge funds in India.
Maintain direct communication with
hedge fund manager.
Check if diverse hedge fund
strategies and techniques are put to use.
Receive and file monthly or
Engage in data mining, keep track
Check with accountant with regard
to tax reporting and implications.
Know your rights, where to seek
help in terms of a dissatisfied hedge fund investment operation, or any other
complaint in general that doesn't confirm with regulations.