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Lokeshwarri S.K.

Hedge fund investments in India lagged global hedge fund benchmarks last month, with the EurekaHedge India index recording negative returns after consecutive months of gains.

The hedge fund industry that was reeling under redemption pressure and asset price erosion in 2008 is now on the path of recovery.

According to Eureka Hedge (EH), a global database provider for hedge funds, assets under hedge fund management has risen to $1.45 trillion in October from $1.29 trillion. Hedge funds in India, however, did not have a smooth run last month.

EH India index declined 2.3 per cent in October. This decline was also greater than EH world index that declined only 0.34 per cent last month. The dismal performance in October has, however, not dented the 2009 returns since the index continues to be up 42 per cent this year.

A major chunk of this increase was recorded in May just after the election results when it jumped 24 per cent.

Hedge fund investments in India are mainly concentrated in equity due to paucity of other adequately liquid investment avenues. This increases the correlation of Indian hedge funds’ performance with the domestic equity markets.

It might be recalled that India-based hedge funds were the worst performers in 2008 with their assets eroding by 50 per cent. Interestingly, India-based hedge funds are also among the top performers this year.

Volatility in the Indian investments of hedge funds is also very high when compared with other country indices. Annualised standard deviation of Eureka Hedge India index is 24 per cent while that for EH Asia ex-Japan index is around 10 per cent and for the EH global index it is 5.5 per cent.

Higher volatility in Indian investments can be due to greater exposure to momentum stocks in the Indian equity universe.

October has been a lacklustre month for equity markets across the world as expectations that stimulus spending would be rolled back and concerns regarding stretched valuations stunted the rally in stock prices.

The MSCI World index declined 1.7 per cent this month. Hedge fund returns based on the Eureka Hedge Fund index were relatively better with a decline of 0.34 per cent due to the diversification of assets into other investment channels besides equities.

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