Mumbai: Forefront Alternative Investment Trust, India’s first local hedge fund, will start road shows in two months to raise money and may start investing with a small corpus.
Mumbai-based Forefront plans to target wealthy individuals and corporations as investors in its proposed fund.
“We will start with a small hedge-fund product and let people see it get off the ground,” said Radhika Gupta, founding principal of Forefront Capital Management Pvt. Ltd, which will launch the fund. “Hedge funds can operate with a Rs.20 crore corpus, depending on whether they are closed ended or open ended.”
Typical investors in private-equity or venture-capital funds, such as insurers and banks, may not be able to put in money in a hedge fund because of their mandates, Gupta said. “Hedge funds are an exotic product,” she said. “They may not be able to participate due to their mandates.”
For an emerging market like India, hedge funds that can deploy diverse and complex trading strategies as well as leverage for investments in listed or unlisted derivatives, are a natural extension to PE or VC funds, experts say.
Hedge Funds look for positive annual returns, low volatility and capital preservation. They achieve this by trading in equities, commodities, currencies, debt, futures, options, swaps, forwards and other derivatives. Hedge funds have till now been nearly absent in India, mostly because of the focus on investments through mutual funds, direct equity and portfolio management services.
Experts are hopeful that alternative investment funds (AIFs) that market regulator Securities and Exchange Board of India (Sebi) allowed in May could change this. AIFs are private investment funds that pool assets from a group of investors and have a defined target.
In the past few years, overseas mutual and hedge funds have utilized the most-favoured investor status granted to foreign institutional investors (FIIs) to dabble in the capital market.
“We are ready for hedge funds,” said Shefali Goradia, partner, corporate tax practice, BMR Advisors, a financial advisory. “We now have the right regulations to let these funds operate.”
Karvy Group also said on Wednesday that it will launch a hedge fund and has asked for permission from the market regulator. It was seeking to offer absolute returns to investors and will be an equity and currency based hedge fund, said Hrishikesh Parandekar, chief executive and group head of broking, wealth management and asset management.
“The intent for starting a hedge fund is very much there,” Parandekar said. “Right now, we do not have a sense of how big the corpus will be.”
The experts, however, caution that while Sebi’s approval created a buzz with initial reactions indicating that at least four to five hedge funds will come into being with a combined corpus of about $4 billion (around Rs.22,000 crore), not many funds are gearing up to register with the regulator as investors seem to believe Indian stock markets are not deep enough to sustain the typical hedge-fund activity of quick profit-booking.
“It’s too premature for Indian markets to absorb large-sized hedge funds. Our markets are not deep enough to spread their risk. Little action from FIIs impacts our markets dramatically,” said Mahendra Swarup, president, India Venture Capital Association, adding that finding talent for running hedge funds will also be a challenge.
Swarup said much like PE industry, which is dominated by global funds, international hedge funds will take the lead in India. “Global interest is building up. Till now, no one was looking at it,” he said. “Major hedge funds will come in towards the end of 2013 and large domestic funds will start registering themselves once they are sure that they can raise capital.”
As hedging and leverage are two key tools used by hedge-fund managers to generate returns, these funds are often blamed for causing market crashes. However, the US capital market regulator earlier this year said there was little evidence to suggest hedge funds can move markets.
Hedge funds did not cause the global financial crisis of 2008, according a September report by Rand Corp., a US-based think tank.
The report, which included an assessment of various other studies as well as a survey of 45 fund managers and lawyers, found that banks and credit-rating firms owed a far bigger responsibility for creating the crisis than hedge funds.