At least six hedge funds are present in India, registered with the capital market regulator as foreign institutional investors (FIIs).
They are Asia Deb Management, LIM Advisors, SAC Capital, Union Bancaire Privee, Ward Ferry Management Ltd and Lionhart Investments Ltd. Of the six, Union Bancaire Privee was registered more than a decade back, in December 1995.
This is significant because India currently does not allow hedge funds, which often get blamed for market volatility through the relatively short-term nature of their investing, to come into the country directly. As a result, there has been informed speculation that some hedge funds are very much active in India using alternative methods to invest in the stock markets. The list confirms that specific hedge funds have been a key part of the domestic equity market.
The Indian capital market was opened for foreign investors in December 1993 and since then the Securities & Exchange Board of India (Sebi) has registered 1,014 FIIs.
“The existing regulations neither say ‘yes’ to registration of hedge funds nor say ‘no’. The fact that some of them were registered in the 1990s is a testitmony to this,” said a person at Sebi who did not want to be named.
Last week, at a conference of regulators from 100 countries in Mumbai, finance minister P. Chidambaram had said that if hedge funds wished to come to India, and if the Indian stock market regulator is comfortable with that, “then I am sure Sebi can put in place appropriate regulations under which they can operate”.
In a recent interview with Mint, Sebi chairman M. Damodaran said hedge funds “are already present in the market” and “we want to bring them through the front door rather have them play in our market, but not in their own names”.
SAC Capital, a $12 billion US-based multi-strategy private asset management firm, which is registered with Sebi since September 1999, is considered to be among the successful hedge funds globally. According to a January Bloomberg News report, the funds run by SAC Capital gave a 30% return in 2006. It has been the best performance in the industry since 2003.
Ward Ferry Management, registered with Sebi since 2002, is a Hong Kong-based investment firm managing $1.4 billion across the Asia-Pacific region. The company’s website doesn’t clearly state that it is a hedge fund, but it was ranked the fourth-largest Asian hedge fund by Institutional Investor’s Alpha magazine in 2006.
The UK-based Lionhart Investments was registered with Sebi in December 2004. Its website describes it is a “global multi-strategy arbitrage hedge fund with a strong track record in capital preservation”.
“Lot of hedge funds have been investing in India for many years. They have done so through participatory notes, through their own FII accounts if they were successful when applying, and through sub-accounts of other firms. Also, many hedge funds are now run by traditional asset management firms that were granted FII status by Sebi and they can use that FII licence to invest in India,” said George Long, chairman and chief investment officer of the Hong Kong-based LIM Advisors. His $700 million company, which manages not only hedge funds, but plain vanilla long-term funds focused on Asian markets, got registered with Sebi in May 2006.
“Hedge funds, with a proven track record, and ready for a scrutiny and transparency, typically prefer to get registered with Sebi,” says Nandita Agarwal Parker, principal at Karma Capital Management, a US-based equity fund. Karma Capital had been investing in India through participatory notes until it got registered with Sebi in March.
One of the reasons why these funds want to invest directly is the rising cost of doing so indirectly, such as through participatory notes. These notes are issued by registered FIIs for their overseas clients who may not want to invest directly in India.
So, for taking an exposure to Indian stocks through participatory notes, overseas investors have to pay a commission that varies from 0.8-0.9% for every buy-and-sell transaction, and 0.35-0.4% for the derivatives market. In comparison, the commission for investing directly through any broker ranges from 0.4-0.5% in the cash market and 0.1-15% in the derivatives market.
“It’s cheaper for us to invest directly. The participatory note structure ties you to the counter-party who issues the notes and usually it can only be unwound through the counter-party. If you have your own account approved by Sebi, you can buy through one counter-party and then sell it through another. Also, the stocks are held in your custodian’s account, which has a fiduciary relationship with you,” explains Long of LIM Advisors.
Many fund houses operate both long funds as well as hedge funds. So, it is possible that a fund house known as a hedge fund is actually operating as a long fund in india.
The basic difference between the two is that hedge funds operate only for absolute returns. They are all limited partnership ventures, typically with about 100 high net-worth individuals and even pension funds putting in between $10 million and $20 million each.
The mandate to the fund managers is simple: make money, irrespective of market conditions. Their incentive structure is also very different. For instance, a hedge fund manager usually gets 2% management fee on the corpus of the fund and another 20% of the money made (they call it the 220 incentive structure) while long funds only earn 1.5-2% management fee.
“Hedge funds go short and take a bet against the status quo, which is why they are hated. If one looks at them dispassionately, they exploit the inconsistencies in the market. There’s nothing wrong about it,” said an FII fund manager who did not want to be named.