Homegrown hedge funds line up entry

Mumbai: India may soon have as many as 14 domestic hedge funds managing some $1 billion in funds since the capital market regulator last year allowed the setting up of such high-risk, high-returns investment vehicles.

add_main_imageAt least 11 asset management companies have sought approval from the Securities and Exchange Board of India (Sebi) to launch hedge funds, according to its website, in addition to the three that have already secured permission. Till recently, Indian firms were not allowed to launch local hedge funds, though foreign hedge funds are allowed to invest in the country.

“Out of the 11 names, five have been granted registration. It is yet to be updated on the Sebi website,” said a government official with direct knowledge of the matter, who declined to be named. “The eight registered funds are likely to have a total assets under management of about ₹ 3,000 crore. Applications of the rest six funds are being processed. If all these funds retain 100% of their corpus in the next one year, the total size should be at least $1 billion.”NextMAds

Sebi in May last year introduced regulations for alternative investment funds (AIFs), opening the way for local hedge funds and complex products that have traditionally not been popular with financial regulators due to the liquidity risk they pose to Indian markets.

“Hedge funds have become viable as there is a visible appetite for such alternative products,” said Kalpesh Kinariwala, founder and chief executive of CapVeda Capital India Pvt. Ltd, one of the 11 entities that wants to establish a hedge fund. “Our investor base will entirely be domestic, comprising of institutional investors and others.”

Globally, only wealthy and sophisticated investors park money in hedge funds as they are extremely risky vehicles. Steady inflows and performance-based gains increased hedge fund assets by $60 billion in the fourth quarter of 2012, bringing the total industry capital to a record $2.25 trillion, according to an 18 January report by Chicago-based Hedge Fund Research Inc.

“If you have sophisticated investors who think of risk-
adjusted returns, hedge funds are a viable structure,” said Sumeet Nagar, founder and managing director of Malabar Investments Llc, an asset manager that has sought Sebi’s permission to start a hedge fund. “In the US, hedge funds started off 20 years ago from nothing. Today, they are a big part of the asset management business. India has to go that way.”

“It will be a medium-size fund of ₹ 200-300 crore and will probably take less than a year to raise,” Nagar said about the fund his firm wants to launch.

Unlike other AIFs, hedge funds are allowed to invest in both listed and unlisted securities of companies, derivatives and complex or structured products. Managers are also allowed to borrow, up to a certain limit, under these funds.sixthMAds

India’s regulators have been cagey about allowing hedge funds in the country as these can enter and exit investments at will, potentially posing liquidity threats to the market.

That’s why, to begin with, such funds are required to disclose the overall level of leverage, the leverage due to borrowing of cash, the leverage level due to positions held in derivatives or in any complex product, and the main source of leverage in their fund to both investors and Sebi.

“There is a definite need for an offering that allows asset allocation, hedging, diversifying at some level. Over the next two years, hedge funds and their activity may be slow, but once we are able to show limited partners a track record and strategy, they will come in,” said Rishi Kohli, portfolio manager, Monsoon Capital, which will start pre-marketing activities if its application is approved.

“To begin with, the fund could be ₹ 40-50 crore and our objective is to raise ₹ 100 crore in six-nine months,” Kohli said.

According to the market regulator’s website, the 11 firms seeking to register as AIFs are Ambit Alpha Fund, Avendus India Opportunities Fund III, CapVeda Absolute Return Fund, DSP BlackRock Alternative Investment Fund, Karvy Capital Alternative Investment Trust, Lares Softech Pvt. Ltd, Malabar Capital Trust, Monsoon Alternative Investment Trust, Motilal Oswal Alternative Investment Trust, Narnolia Alternative Investment Advisors Llp and The Rudrabhishek Infrastructure Trust.

Although not all of them are calling themselves hedge funds and a few have sought to register as complex leveraged products, they essentially have similar investment structures.

Three firms—Forefront alternative Investment Trust, IIFL Opportunities Fund and Quant First Alternate Investment Trust—have already been granted approval, according to data on Sebi’s website.

Complex products such as hedge funds, according to Sebi rules, will be subjected to regulations in areas of their operational standards, conduct of business rules, prudential requirements, restrictions on redemption and grounds of possible conflict of interest. However, as these funds are relatively new in India, the regulator is cautious to begin with and is willing to amend rules as the industry evolves in the next few years, said the government official cited earlier.