Trends. ‘Investors are more open to hedge funds now’

Alternative Investment Funds (AIFs) made a late entry into India, but are now rapidly gaining popularity.  Earlier, foreign hedge fund managers did invest in Indian equity and debt instruments, but those who invested in foreign hedge funds were predominantly overseas investors.

AIFs were first opened to domestic investors after SEBI issued the Alternative Investment Funds Regulation in 2012.

However, with the minimum investment in these funds set at ₹1 crore, this channel is closed for retail investors.

Over the last three years, many Indian HNIs have taken to this novel investment vehicle. Towards the end of 2014, 125 AIFs were registered with SEBI.

Andrew Holland, CEO, Ambit Investment Advisor, who has successfully steered one of the popular AIFs in the country, the Ambit Alpha Fund, talked to BusinessLine about his experience in running this fund.

What is the current size of the Ambit Alpha Fund? What are the returns you have delivered in this period?

The fund was started in June 2013 and has grown to over ₹700 crore currently. As an absolute return fund, we do no benchmark to any indices.

That said, to give an overall perspective to the market, in the first financial year, that had 10 months, the fund returned a positive 21 per cent.

Nifty was up 12 per cent in that period. Last full year — FY 2014-15 — the fund returned 34 per cent and Nifty was up 27 per cent then. This fiscal, till the end of September, the fund has delivered positive 7 per cent, while Nifty is down 7 per cent in this period.

What is the aim of the fund?

The objective of the fund is to produce risk-adjusted positive absolute returns, irrespective of whether the market moves higher, lower or sideways, through long and short positions in equities and indices, where a specific catalyst supports our views.

What is the strategy you adopt to achieve these returns?

We believe success depends on an accurate understanding of global/local dynamics impacting the country; a thorough understanding of companies’ fundamentals; and an actively managed portfolio approach which leverages on global and domestic macro, thematic, event-based and bottom up value based investing inputs.

Basically for India we estimate GDP growth, going forward, and identify sectors that are likely to benefit from this growth; these naturally form the basis of our long side of the portfolio.

Sectors, which we believe would be laggards in this growth scenario, will form part of our hedging strategy as they are likely to underperform.

This is combined with global inputs before stock selection takes place.

Given the recent volatility in the markets, how has this strategy delivered?

As mentioned, as the fund is not benchmarked to any indices, we first and foremost look to protect investors’ capital.

To achieve this, we can take active cash calls in the fund and keep a high hedge on funds deployed in the market. This strategy helped us eke out a small gain during August when the market fell nearly 7 per cent.

In fact, if you look at the volatility of the fund it is very low at around 6 per cent.

This compares very favourably with the Nifty volatility of 16 per cent and long-only funds of 20 per cent+.

Moreover, bond fund volatility ranges from 3-6 per cent. So, an investor is seeing one-third the volatility of long-only funds but is still receiving returns that are comparable to equities.

Why do you think AIFs are finding favour with investors?

If you look over the past 15 years or so, the Nifty has returned around 14 per cent compound over that time.

However, if you invested in 2008, it would have taken four-five years just to get your capital back.

So investors are appreciating funds that can deliver returns that are consistent and match the growth of the past 15 years.

What is the outlook for India’s GDP growth?

We believe the GDP growth in India is about to accelerate as the government spending on infra starts to have a multiplier effect on the economy.

The recent move by the RBI to lower interest rates and with more cuts to come, it may help restore confidence in India Inc.

Given the recent slowdown in China, India has a wonderful opportunity to grab a larger share of global investment.

If some important reforms, such as GST, bankruptcy laws, can be pushed through, then India will be seen as the “next engine of growth”.

What proportion of an HNI portfolio should go into a hedge fund?

Overseas alternative fund instruments represent 10-15 per cent of the portfolio, of which hedge funds represent the larger portion. As awareness of these products grows and new funds are launched, we expect portfolios in India to move towards having 10 per cent of their investments in alternative funds. Indian investors are more amenable now.

Not just HNIs, but family offices and corporate treasuries are also considering these investments. 

COMMENT NOW