Hedge funds investing in Indian assets have struck gold.

Managed futures hedge funds in India that employ strategies involving equity derivatives were among the star performers for the industry globally in January-November 2013. These funds delivered 18.2 per cent returns for the 11-month period, finds independent financial data and research company Eurekahedge.

6 per cent from Sensex Direct investment in equity would not have been as fruitful as the Sensex delivered only 6.6 per cent returns in the first 11 months of this calendar.

Queried on the investment strategy followed by the top managed futures hedge funds operating in India, Eurekahedge analyst Mohammad Hassan says they invested in “Nifty index futures, Nifty index options, and the top 100 most liquid single stock futures. Some funds use proprietary ‘quant’ models and benefited from their contrarian investment strategies as the Indian equity market saw increased volatility in the latter half of the year.” This strategy relies heavily on the expertise of the fund managers for picking the right futures contracts to hedge on. These hedge funds now have a clear three-year track record of success in India, having posted 5 per cent gains in 2012 and 28.3 per cent in 2011.

Indian investors wanting to invest in hedge funds can therefore choose a managed futures fund floated by hedge fund managers such as CapVeda, Edelweiss Alternative Asset Advisors or Karvy Capital.

Other strategies have not been as profitable in India and the overall return of India-focused hedge funds was negative, with 7.1 per cent losses for the January-November 2013 period.

Particularly disappointing were funds with fixed income and long/short equity bias. Fixed income funds are staring at nearly 17 per cent losses and long/short equity funds were down 8.6 per cent.

“A number of long/short equity fund managers invest with a ‘long bias’ and therefore were impacted adversely by the market downturn in Indian equities during the May-August period when the S&P BSE Sensex declined 4.53 per cent,” explained Hassan.

“In 2013, Indian hedge fund managers were exposed considerably to the broader macro risk, and struggled amidst increased volatility in the underlying markets. A narrow country focus (India, that is) adds a further layer of risk as opposed to hedge fund managers investing with a global mandate,” he added.

Global gloom Hedge fund performance globally has been below par in 2013. On an average, global hedge funds registered 7.1 per cent gains during the period. This is far below the gain of 21 per cent in the MSCI world index in this period.

“On the whole, institutional investors, HNWIs and family offices are more comfortable investing in hedge funds owing to their superior risk-reward profile in comparison to alternative investment vehicles which track benchmark indices and suffer from high volatility. The average global hedge fund has delivered an annualised return of 9.78 per cent with an annualised standard deviation of 5.20 per cent since December 1999 to November 2013,” said Hassan.