• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Lokeshwarri S.K.

BL Research Bureau It is no secret that the stock market decline in October was spurred by hedge funds selling to meet redemption pressures.

Despite the mayhem that they caused, hedge funds in general have braved the storm pretty well and have outperformed the equity indices by a wide margin.

Unfortunately, the same cannot be said of India-specific Hedge Funds (IHFs). These funds are at the bottom of the hedge fund performance table. Hedge funds are pooled investment vehicles akin to mutual funds that invest in publicly traded securities.

But unlike mutual funds, which seek to deliver returns that are better than a specific index or benchmark, hedge funds seek absolute returns irrespective of how the markets behave.

According to a report complied by Eurekahedge, a leading global hedge fund researcher, while the year-to-date losses of hedge funds across regions and strategies is only 12 per cent, India-specific funds have grossly underperformed, with a 53 per cent loss.

Eastern Europe and Russian funds, with 47 per cent loss, are the second worst performers. The performance of India-specific hedge funds compares poorly with other hedge funds in the Asian region too whose returns range between 13 and 25 per cent.

The weakness of the Indian currency could be a key reason behind the dismal returns of IHFs this year. The rupee has depreciated 27 per cent against the dollar this year, thus widening the losses suffered on Indian holdings.

Relative out-performance of other Asian currencies such as the Singapore dollar, Hong Kong dollar, and Taiwan dollar would make investments in these countries more attractive for hedge fund investors.

Another explanation for the poor returns on India-specific funds could be because only two types of funds, from a suite of alternative offerings, are active in India: long-short equity funds (funds that offset “buy” positions in some stocks with “sells” in others) and multi-strategy funds.

High volatility in equity markets in October has resulted in the long-short equity funds suffering the maximum damage across regions.

Lack of an active debt market and stringent regulations for investments by foreign investors in other asset classes may also restrict the strategies that hedge funds can adopt in India, hampering returns.

The performance of hedge funds thus far in 2008 has lived up to their promise of delivering even in bear markets. One category of hedge funds, CTA (commodity trading advisor)/managed futures, and macro funds have even managed a gain of more than 10 per cent return in the first nine months of this year.

But the hedge fund industry has been reeling under redemption pressure, especially since September. The report released by Eurekahedge says that outflows from hedge funds reached a three-year high at $62.7 billion in the month of October. These outflows, coupled with the loss of 3.9 per cent suffered in October, shrank the assets under management by $110 billion to $1.65 trillion by the end of October.

More Stories on : Stock Markets | Foreign Institutional Investors

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line