V V: Between God and Mammon

Tom Wolfe in his 1980s best-seller, The Bonfire of the Vanities, described investment bankers as “the masters of the universe”. That description was soon outdated in the 1990s because hedge fund managers assumed the mantle. Just consider two simple facts. In 1990, hedge managers managed assets worth $39 billion. At the peak of 2007, the figure had grown to a staggering $3 trillion. Equally staggering is the amount of money successful hedge fund managers earned in 2008, the top 10 more than $10 billion between them. Quite clearly, the returns hedge funds make can be substantial, given the high fees they charge for services rendered. But there was a downside — the losses can be substantial too — as some discovered in the credit crunch market upheaval that started in 2007. But in the swings and roundabouts, hedge funds became the “In” thing if you were looking for a “gravy train” as Sebastian Mallaby tells us in his definitive work drawn from insights into higher mathematics, economics and psychology in More Money than God: Hedge Funds and the Making of a New Elite (Bloomsbury/Penguin India, Special Indian Price, Rs 599).

Begin from the beginning. While most people have heard how much hedge fund managers have made, very few are clear what they are or what they do. To get a hang what the game is about, it is best to start with Philip Goggan’s Guide to Hedge Funds: What they are, what they do, their risks, their advantages (Profile Books, Indian reprint 2011, Rs 295). Coggan, who was the economics editor with The Economist and earlier with the Financial Times, has covered the fundamentals in six easy-to-read chapters: Hedge Fund Taxonomy; The Players; Funds-of-funds; Hedge fund regulation; Hedge funds: For or Against; and The Future of Hedge funds. Of course, More Money than God covers the same ground too, but this is an easier read and once you have grasped the rules of the new game, Mallaby’s big tome becomes that much simpler and enjoyable.

Mallaby has written the book for a wide range of readers, from hedge fund managers and finance professors to the intelligent common reader interested in markets, economics and finance.

The story begins with Alfred Winslow Jones, an eccentric who at different times in his life worked on a tramp steamer, studied at the Marxist Workers School in Berlin, a friend of Ernest Hemingway and other outsiders. Like many top hedge fund managers, Mallaby tells us that Jones didn’t learn the ropes at Goldman Sachs or Morgan Stanley, did not go to business school, nor did he have a PhD in quantitative finance. What he did have, however, was an unerring instinct for money like all successful fund managers possessed.

Jones launched the fist “hedged fund” meant to use leverage to enhance equity exposure along side short sales to protect one’s downside, and he first conceived the concept of “performance fee” whereby his fund would keep for itself 20 per cent of the profits. Mallaby tells us with his fund’s returns at 5,000 per cent, investors didn’t mind parting with 20 per cent of the profits. Many commentators today feel that 20 per cent is too high a fee to be paid but Jones quite rightly believed that the anticipation of substantial returns would concentrate the minds of portfolio managers. Besides, Jones argued that “performance fee” was an expense and could be written off against the profits; others like Mallaby think it is a tax dodge. Jones’ performance-fee innovation still forms the basis for the hefty returns of hedge fund managers.

With Jones as the introduction, Mallaby provides a continuous history of investment vehicles which he calls “loners and contrarians”, the very “individualists whose ambitions are too big to fit into established financial institutions”. These individuals can’t be tied down by regulations and red tape. They defy the conventional wisdom about efficient markets and could be described as “edge funds” for their managers offer investors returns uncorrelated with the markets.

Mallaby explains that markets are efficient only if the liquidity is perfect; and when liquidity is not perfect, markets can be highly dicey or fickle. Mallaby takes the case of Steinhardt who offered liquidity where it didn’t exist, especially when it came to a large block of shares. He was able to negotiate discounts in return for liquidity which eventually returned to his original investors 480 times their initial investment. Fund managers can do this but only if they have a large amount of cash to play around with; if they don’t have a fall-back strategy, it is simply not possible to achieve such high returns.

Mallaby’s story of the Hungarian immigrant George Soros is inspiring, considering that he started off in London as a busboy and once told by the head waiter at a restaurant that if he worked hard he would some day be his assistant. Soros made it to the London School of Economics and although he didn’t do well academically, he learnt that markets were anti-efficient and that it was possible to make money by trading on faulty human reasoning.

Hedge funds have sometimes been described as “casino capitalism”, that success depends on the luck of the draw. But it is also a play on the vagaries of the human mind which Mallaby’s story-telling brings out beautifully.

'India handled the crisis extremely well'

Pulitzer Prize winning author Liaquat Ahamed speaks about the “absurdities” committed by governments throughout history in the wake of financial crises
t may seem ironic to hear a hedge fund manager speak freely about the evils of the financial system, butLiaquat Ahamed speaks with such unerring conviction and precise logic that it’s impossible not to be mesmerised by his arguments. The professional investment manager, who won the 2010 Pulitzer Prize for History for his book Lords of Finance: The Bankers Who Broke The World, has also worked at the World Bank in Washington DC apart from serving as a consultant to several top hedge funds. 

Why do you think the Indian economy – for the most part – has remained immune to the worst of the economic crisis?

India has hardly been affected by the recent financial slowdown. Indian banks weren’t exposed to the kind of mortgages American banks were, they were also reasonably well capitalised. India only got hurt when trade got hit – especially in the case of, say, the IT industry.

What worked for India is that it had built up a nice cushion of foreign exchange reserves which, very smarty, it used at the right time. All said and done, India definitely handled the crisis very well. But, of course, that doesn’t mean India will never have a financial crisis 

What can India do to prevent that?

Well, economic crises have two ingredients. The first one is a bubble or a mania. For example, as anyone who comes to Mumbai can vouch for, it’s ludicrous that real estate prices here are higher than they are in New York or London. That is a recipe for disaster. Secondly, at some point, the bubble will burst. That will lead to far too much borrowing which will in turn lead to banks getting heavily exposed.

Basically, to avoid a crisis, banks, which are essentially the plumbing of the economy, need to remain robust. Whether banks or private or state-owned are irrelevant; what matters is if they’re well-run. The answers lie in, quite simply, lots of capital and more stable sources of funding. This, I believe, is something India has gotten right so far.

You’re famously opposed to the gold standard. What are your reasons for that?

The gold standard system requires you to have gold as the foundation for the financial system. That requires you to have that much gold. Now, if you took all the gold in the world and you piled it up, it would end up forming a two-storey office building the size of a tennis court. That’s not nearly enough to fuel the world economy.

That’s the first problem. The second problem is, if you raised the price of gold so that it could generate that much money, you’d have to raise its price by about 10 times. Furthermore, the biggest problem is that discoveries of gold are growing by say 2% a year, while the world economy is growing by 4% a year and the entire global financial system is growing by 6% a year.

What’s your next book all about?

I’m writing about economic history. I’m going further back in history to the 19^th century to the conflict between the government in Washington and Wall Street. My objective is to show that anti-banker sentiment goes back a long way in the United States.

FIIs include hedge funds, pension funds and MF

A foreign institutional investor (FII) is an investor or investment fund that is registered in a country outside of the one in which it is currently investing. FIIs include large hedge funds, insurance companies, pension funds and mutual funds. They are required to register with the Securities and Exchange Board of India (SEBI) to participate in the markets here.

The buoyant markets in 2010 owe much to FII influx. FIIs bought equities in the markets to the tune of around 28.6 billion dollars (Rs 1.30 lakh crores). The first week of 2011 began on a grim note as the Sensex and Nifty dropped contrary to expectations of breaking barriers. The banking stocks pulled the indices down, followed by metals sector that faced selling pressure too. The markets are choppy and are bound to remain so for a few more weeks. Since significant market turnover can be attributed to FIIs, it is essential for investors to chalk their strategy after observing FII movements and investment patterns.

Hedge Fund Capital Raising for 2011

New York (HedgeCo.net) – 2011 will be a very good year for flows into the hedge fund industry despite the recent negative publicity generated from the insider trading scandal, according to hedge fund consulting specialist Don Steinbrugge, Chairman at Agecroft Partners.

“This conclusion is based on several dominant and emerging trends identified through conversations with more than 300 hedge fund organizations and 1,500 institutional investors during 2010.” Stienbrugge said.

These trends include: 1. decreased competition from large prominent hedge funds: 2. improvement of capital flows across most major hedge fund investor segments including endowments, foundations and hedge fund of funds: 3. large increase in hedge fund launches: 4. increased allocations to small and medium sized hedge funds: and 5 increased importance of high quality marketing. These trends are explained below.

Decreased competition from large prominent hedge funds

In 2009 and 2010 there was a significant increase in competition within the hedge fund industry due to many previously closed hedge funds opening their funds to new assets. There were two primary reasons for this competitive increase. First, managers wanted to replace assets which had redeemed after the 4th quarter of 2008. Second, many of these high profile managers were below their high water mark and they needed new assets to generate fees in order to pay and keep their people. After two years of the majority of assets flowing to the largest hedge funds combined with strong performance, many of these big funds have either closed or are near capacity. Of the large hedge funds that aren’t yet closed, many either have issues or are gathering assets dilutive to their returns. The end result is less competition for assets from the largest well known hedge funds as investors shift their focus away from investing in brand names toward managers capable of generating future alpha.

Improvement of capital flows across most major hedge fund investor segments including endowments, foundations and hedge fund of funds

2010 saw the hedge fund industry approach its all time high for assets. This was primarily driven by a gradual yet substantial increase in allocations made by pension funds looking to enhance their risk adjusted returns and decrease their unfunded liability. This trend will continue throughout 2011 as we see an increase in the number of pension funds allocating to hedge funds as well as an increase in the percentage of their portfolio asset allocation to hedge funds. Pension funds will continue their evolution in how they achieve their hedge fund exposure. This process begins with an investment in fund of funds, followed by investing directly in brand name hedge funds, then focusing on alpha  generators and finally changing to the endowment fund model of  “best in breed” hedge fund investing.

Agecroft believes 2011 will see the return of many hedge fund investor segments that have been primarily on the sidelines the past two years. Some of these segments are reviewed below:

1. Endowments and Foundations: The endowment and foundation space is a bifurcated market comprised of organizations with more than $1B AUM and those with less than $1B AUM. Many of the larger endowments and foundations experienced significant liquidity issues within their portfolios as the expected duration of their private equity portfolios lengthened after 4^th quarter 2008.  These liquidity issues greatly reduced hedge fund allocations from this market segment over the past two years. Most of these liquidity issues have now been resolved and as a result we will see a significant increase in hedge fund allocations by large endowments and foundations in 2011. This will especially benefit mid-sized hedge funds as these sophisticated investors tend to have a bias against the largest hedge funds. For endowments and foundations with less than $1B AUM, 2010 provided an opportunity to increase their average portfolio allocations to hedge funds. We expect this trend to continue in 2011 as these mid-sized endowments move closer to the allocations of their larger peers.

2. Hedge Fund of Funds: 2009 and 2010 saw significant contraction in the number of hedge fund of funds as many ceased operations due to 1. Madoff exposure, 2. poor performance 3. strategic decisions by a parent company 4. lack of profitability, or 5. acquisition by larger competitors. In addition, a majority of assets flowed to a small number of the largest hedge fund of funds managers, keeping most hedge fund of funds well below their asset peak. This dynamic significantly affected small and mid-sized hedge funds managers because the largest hedge fund of funds tend to allocate to the biggest hedge funds, due to the large amount of money they need to allocate. The balance of the hedge fund of funds marketplace,which typically prefers the small and mid-sized hedge funds, were not allocating because as their assets declined, instead of replacing under-performing managers with new managers, they simply ran more concentrated portfolios.

Agecroft expects these trends to reverse. Most of the flows into the hedge fund of funds industry have come from large institutional investors who have been more focused on the perceived security provided by the size of a firm and its infrastructure as opposed to pure performance. Many large institutions have invested in a number of hedge fund of funds in an attempt to diversify their exposure. They may not realize that many of these large hedge fund of funds have significant overlap of underlying managers and have underperformed their smaller peers. As large institutional investors continue to increase their knowledge of alternative investments they will begin to utilize a hub and spoke approach to hedge fund of funds investing. This approach involves a hub investment in one of the largest hedge fund of funds as the core hedge fund allocation, and spokes made up of niche hedge fund of funds that either focus on small to mid-sized managers or specific strategies like CTA/Global Macro, Credit or Long Short Equity.These strategy specific hedge fund of funds will also be utilized in other parts of institutional investor’s portfolios in addition to their hedge fund allocation.

This growth of niche hedge fund of funds will increase the number of hedge fund of funds while insuring a smaller percentage of assets flow to the largest hedge fund of funds.  Likewise, as these smaller, niche hedge fund of funds see their assets stabilize and begin to grow, they will reduce the concentration of underlying managers and begin to allocate again to new hedge fund managers. This should result in small and mid-sized hedge fund managers being included in more searches.

3. Family Offices: This segment of the market place has experienced significant growth as more and more super high net worth families hire full-time staff to manage their assets. This growth has recently been fueled by fortunes made in the technology, private equity and hedge fund industries. Many of these family offices prefer small and mid-sized managers who they view as more nimble and able to generate higher returns. Family offices will continue to be active allocators to hedge funds.

4. Consultants: The hedge fund consultant market place has seen explosive growth as more institutional investors and large family offices begin to invest directly in hedge funds. These consulting firms have seen their hedge funds asset under advisement balloon in size, which will eventually create difficulties for these firms in adding value to their client’s portfolios. 2011 will see continued growth in this industry with increased competition from new entrants into the marketplace from both traditional institutional consulting firms and hedge fund of funds organizations creating customized,separately managed portfolios for large institutional investors.

Large increase in hedge fund launches

The number of hedge fund launches steadily declined over the past two years as asset flows for start up managers slowed to a trickle. This created pent up demand for mangers wanting to launch a new fund, but waiting for improved market conditions before starting their new venture. With improved asset flows across most major hedge fund investor segments, many of these managers will have the confidence to finally launch their new funds. This will make 2011 the best year for hedge fund launches since 2007. This activity will be further fueled by leading financial institutions shedding their proprietary trading desks resulting in multiple, billion dollar hedge fund launches.

Increased allocations to medium and small hedge funds

2009 and 2010 were devastating for small and medium sized hedge funds. Even though these managers represent 95% of the number of hedge funds, they were only able to attract a small fraction of new hedge fund allocations. This despite the fact a study conducted from 1996 through 2009 by Per Trac showed that small hedge funds outperformed their larger peers 13 of the past 14 years. Unable to attract new assets, these small and mid-sizedhedge fund organizations feared the industry was in a new paradigm making it almost impossible to raise assets going forward. Agecroft believes thata much larger percentage of assets will flow to small and mid-sized managers due to the many strong trends leading into 2011 discussed here. These trends include less competition from the large, well known hedge fund managers, as well as increased allocations from endowments, foundations and hedge fund of funds. These investors tend to focus more on alpha generators than brand name hedge funds. In addition, we will see some of the more sophisticated pension funds allocating to small and medium sized hedge funds.

Continued importance of high quality marketing

Although a larger percent of assets will be allocated to small and medium sized hedge funds, the days of posting performance numbers to hedge fund databases and waiting for the assets to come are over.  The market remains highly competitive with approximately ten thousand hedge fund managers. The typical institutional investor utilizes a process of elimination in selecting hedge funds where they are contacted by thousands of investment firms a year, meet with a couple hundred and ultimately hire half a dozen. Their due diligence process is longer, more focused and deeper than ever before. Institutional investors typically require three to five meetings before making an investment decision. Their process focuses on multiple evaluation factors including: 1. organizational quality, 2. investment team, 3. investment process, 4. risk controls, 5. operational infrastructure, 6. terms and 7. historical performance. A perceived weakness in any of these factors will eliminate a firm from consideration. As a result, hedge fund managers need to not only have a well refined marketing message that effectively articulates their differential advantages over their competition, but also a professional, proactive and knowledgeable sales force able to deeply penetrate the market place and stay involved with investors throughout their lengthy due diligence process. This is very difficult for a single salesperson to achieve. As a result, we will continue to see hedge funds building out their sales teams and leveraging third party marketing firms to expand their distribution efforts.

In conclusion, Agecroft Partners expects 2011 to be a strong year for flows into the hedge fund industry. Although the competition from the largest, well known funds will decline, the market place will remain highly competitive where a majority of assets will be going to a small percentage of managers. The managers that are successful growing their business will be those that rank well across multiple evaluation factors, have a high quality marketing message and strong distribution capabilities. The hedge fund industry is moving toward a period of sustained growth driven by institutional investors that will increasingly adopt a more institutionalized process for evaluating hedge fund managers.

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India not a big hedge fund region: Eurekahedge

In an interview with ET Now, Farhan A. Mumtaz, analyst, Eurekahedge, talks about the performance of hedge funds in India and global markets. Excerpts: 

How are India hedge funds doing now because year to date until April, they were beating the Sensex. How did they fair in May? 

The trend across the regions, actually not just India, in May was a negative one. So market hedge funds have suffered some losses in May in India as well as in other regions. However, they have outperformed the underlying markets. So at this point, year to date performance is still okay and even the May performance, when compared to markets, can be considered as an outperformance. So going forward, the managers who have adopted some protective positions, will continue to do better than the markets. 

But they are absolute return players. So year to date until May, do you think they are still sitting on positive gains or have they slipped into the negative territory? 

Well, the Eurekahedge Global Hedge Fund Index is up. It is up 0.7-0.75%. In terms of regions, the more developed regions are still in the positive. Asia ex-Japan is negative about -4%, but again, that is because the markets have been quite volatile of late. There have been sharp movements across the markets. You are right that they are absolute return vehicles and they are negative year to date, but compared to the other asset classes, they are doing a good job of protecting capital. 

Is new money coming into India funds? A prominent India hedge fund manager I spoke to expresses concerns on that scope. 

Well, in terms of asset flows, there has been some interest in Asia, especially due to the performance over the last year. Also there have been some startups in Asia and there have been launches in Asia. When talking specifically about India, it is not a very big hedge fund region at the moment, but there have been some launches this year. There have been launches in Singapore, Hong Kong and in India which are focussed on India. So the asset flow has not been negative, but it has not been very positive so far this year. 

What are the cash balances like in India at this point on time? Are managers sitting on more cash because of the volatile investing environment? 

Managers have adopted some protective measures. They are being cautious and the trend right now is to be more flexible in the approach to be positioned for any short term movements which can either go down or to be able to profit from any uptrend which might happen. And yes, there are some funds which have maintained some high cash volumes at this point. 

hedge fund defination

he term hedge fund is used to indicate a 'hedge' against investment deterioration. Hedge fund can be defined as a managed portfolio that has targeted a specific return goal regardless of market conditions. Hedge funds specialize in gaining maximum returns for minimum risk. Hedge funds use a wide variety of different investing strategies to achieve this goal and generally these strategies are managed and executed by a portfolio manager.

Strategies that can be used by the portfolio manager of a hedge fund include short selling, arbitrage, hedging and leverage. The portfolio manager uses these options to remain flexible and weather the various storms of the market.

Short selling means borrowing a security (or commodity futures contract) from a broker and selling it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the broker. Short selling (or "selling short") is a technique used by investors who try to profit from the falling price of a stock.

Arbitrage means attempting to profit by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.

Hedging is the practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. A long hedge involves buying futures contracts to protect against possible increase in prices of commodities. A short hedge involves selling futures contracts to protect against possible decline in prices of commodities.

Leverage is the use of borrowed funds at a fixed rate of interest in an effort to boost the rate of return from an investment. Increased leverage causes the risk and return on an investment to also increase.

List of Hedge Funds in India

Ist Hedge Fund - HFG India Continuum Fund 

Hudson Fairfax Group (HFG) is an investment partnership focused on India’s aerospace, defense, homeland security and other strategic sectors. It is based in New York with an advisory office in New Delhi. Its team has five decades of focused experience in the sector combining investment and industry expertise. Hudson Fairfax Group, through its predecessor company, started as an investment advisory firm in 2005. It ran an investment fund, the HFG India Continuum Fund, which invested in publicly traded Indian securities. During the operation of its fund, HFG was a Registered Investment Advisor (RIA) with the U.S. Securities & Exchange Commission and a Foreign Institutional Investor (FII) with the Securities & Exchange Board of India. 

2nd Hedge Fund - Avatar Investment Management 

Avatar Investment Management is the investment advisor to three funds. Headquartered in Mauritius, the funds are focussed on the Indian public and private equity markets. In order to meet the approval of various regulatory bodies around the world, only accredited investors may apply to invest.

3rd Hedge Fund - India Deep Value Fund 

India Investment Advisors, LLC was founded by Robin Rodriguez and Raj Agarwal in 2006 to pursue the number of significant investment opportunities presented by the burgeoning Indian capital and real estate markets. As a result, the India Deep Value Fund was launched in April 2006. The Fund's Managers seek to achieve long-term capital gains by acting as pro-active deep value investors in publicly-traded Indian stocks.

4th Hedge Fund - Fair value 

Fair Value Capital is a highly specialized and exclusive Investment Advisory Firm focused on Deep Value Investment opportunities primarily in Indian equity markets. It seek absolute, long-term returns for its investments while minimizing investment risks using a Value oriented approach towards our investments. Fair Value specializes in Deep Value Investments in the Indian equity markets. 

5th Hedge Fund - Indea Capital Pte Ltd 

Indea Capital Pte. Ltd (Indea) is a Singapore based investment advisor. Indea was formed in 2002 to provide boutique fund management services to institutions, foundations, family offices and high net-worth individuals. In July 2003, Indea launched the Indea Absolute Return Fund (IARF), a directional fund investing in India and Indian companies globally. The principals have a combined over 30 years of experience in researching and investing in India. In addition to the Singapore office, Indea has a research presence in Mumbai, India.

6th Hedge Fund - India Capital Fund 

India Capital FundSM is an open-ended Investment Company incorporated in Mauritius which has invested in India since 1994. Shares of the India Capital FundSM 

7th Hedge Fund - Monsoon Capital Equity Value Fund

India Capital FundSM is an open-ended Investment Company incorporated in Mauritius which has invested in India since 1994. Shares of the India Capital Fund 


8th Hedge Fund - Karma Capital Management, LLC

Monsoon Capital is the adviser to onshore and offshore private investment partnerships and specializes in equity investments in India.

9th Hedge Fund - Atyant Capital 

Karma Capital Management LLC is an organization with dedicated professionals engaged in providing specialist, fundamentally based, alpha-seeking India Focused products including long-only equity and long-short products. Our wealth of experience has guided us in offering attractive risk-adjusted, performance-driven products that take advantage of market opportunities and meet specific client objectives. From diversified proprietary fund portfolios to customized programs for a full range of global institutional investors, our capabilities and product offerings address the various investment needs of investors around the world.


10th Hedge Fund - Atlantis India Opportunities Fund 

Rahul leads Atyant Capital Advisors, advisor to the Atyant Capital India Fund. In the last 10 years he’s managed money exclusively in the Indian markets. His mission is to consistently identify the best 10-15 investment ideas from among the thousands of publicly-traded Indian corporations. Rahul’s value-based investment philosophy stands apart due to his belief in the paramount importance of corporate governance, specifically how management operates with its minority shareholders in mind.Prior to Atyant, Rahul spent four years leading Meridian Investments, generating a 430% absolute return for the firm’s high net worth clients

India-focused hedge funds ranked among world's top performers

Hedge funds investing in India are not making as much headlines as they did during the previous bull run in 2007-08, but they seem to be making money for investors . Good enough to be ranked among the best-performing hedge funds globally, according to analysts at Singapore’s fund research house Eurekahedge.

The Eurekahedge Indian Hedge Fund Index returned over 5% in the first eight months of 2010 vis-à-vis 2% gains by benchmark Sensex in the same period. The numbers for September were not available. Asset managers attribute the decent performance of India-focused hedge funds to the buoyant stock market, ‘long only’ strategies by their managers and gains in mid-cap shares.

Within Indian hedge funds, 68% of the funds employ ‘long-short’ equity strategy — a mix of buying assets as well as short-selling them — and more than 70% of the funds invest in equities, said experts.

“Hedge funds are active in Indian equities,” Farhan Mumtaz, senior analyst, Eurekahedge told ET. “Funds with global and emerging market mandates have also increased their allocations to India,” he added.

Longer investment time-frame has helped hedge funds log better returns this year. Funds belonging to asset managers like Q-India, Halbis, FMG, Baer Capital and Insynergy have all outperformed benchmarks and key hedge fund indices during the considered period. The case was different in 2009, when the Eurekahedge Indian Hedge Fund Index returned just 52% against 76% logged by the Sensex.

According to Mr Mumtaz, most hedge funds have turned cautious and the proportion of ‘long-short’ strategy has come down from 80% in 2008-09 to 68% in 2010.

Long-short strategies involve allocating a specific percentage of the corpus to buy securities that are expected to go up while short-selling those expected to decline in value. When balanced correctly, long-short strategies provide absolute returns with low correlation to the benchmark.

Funds are employing broader mandates (such as multi-strategies) in their attempt to not remain dependent of price momentum of stocks. “Hedge fund managers tried complex strategies in 2008 and failed, as a result of which they been reasonably defensive in 2009 and 2010. They have now managed to get some good sectoral and stock calls,” said Alok Sama, president, Baer Capital Partners.

According to him, hedge funds have managed to log higher returns by investing in liquid mid-caps. “Most of them have been long-term bets. However, buying Indian shares is a bit difficult now since most counters are trading at expensive price levels. The current market rally has been fuelled by excess liquidity,” added Mr Sama.

Steady investment returns have resulted in the swelling-up of asset bases of most India-focused hedge funds over the past few months. Average asset under management of an Indian hedge fund is estimated at $65 million by fund researchers. Most of the money (for India-focused funds) is coming from hedge funds, family offices and high net worth investors.

Source: Economic Times