The document outlines the definition, strategies, and performance of hedge funds, emphasizing their objective of generating absolute returns with flexible investment approaches. It discusses the Indian hedge fund context, highlighting the attractiveness of India's market to investors and detailing regulatory frameworks governing hedge funds. Various hedge fund strategies are explored, showcasing how they navigate risks and volatility, along with notable historical performances and challenges faced by prominent hedge fund managers.

1. Hedge Funds
-Avinash and Sham

2. Defining Hedge Funds
Opinions differ regarding the definition of the phrase “Hedge
Fund”. The most commonly accepted definition is that a
hedge funds are the funds which:
• Have an absolute return performance objective
• Allow the manager to be active on both the long and short
sides of the markets
• Compensate the manager with performance related fees
• Allow the manager tremendous flexibility in investment
style and approach

3. What are HFs?
• “To hedge one’s bets” i.e. betting on other
side to limit the possibility of loss on a
speculation.
• Hedge funds
– pool of funds of the highly influential investors,
– open to limited number of investors
– require high investment
– include high expertise based investment strategies
and Risk management

4. Targeted Investments
They can invest in any type of asset class or opportunity luring in the
any market, be it
• options,
• derivatives,
• equities,
• bonds,
• undervalued securities,
• currencies,
• Commodities
• events such as mergers or bankruptcies,
• domestic as well as international markets where they can expect
to receive attractive returns in all kind of risky situations.

5. Motive of Hedge Funds
• Protecting capital (i.e. the private pool of
funds)
• Generating superior returns in all kinds of
markets (they are ready to take bearish
markets also)
• Attempting to minimize the risk i.e. to hedge.

6. Past Returns
40%
Bear Market Achievers Riding Asset Growth Crisis
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
2000 2001 2002 2003 2004 2005 2006 2007 2008
MSCI All- Country World Index
Hedge Fund Research Index Fund Weighted Composite Index

7. Indian Context
• Asian countries are offering many opportunities
• Market in UK and US are facing
– huge meltdowns
– investors are finding hard to sustain there
– money making options are drying
• India is offering various necessary conditions for
hedge funds to explore with its
– secondary market liquidity
– Futures
– options, etc.

8. Why India?
• Investment can be made through FII (Foreign
Institutional Investors) route.
• Doesn’t charge anything on performance or
profit of the fund
• Thus giving India a plus point from others
• Thus attracting more HNIs to enter India
through these.

9. Incremental Nominal GDP
(in Billion US $)
40,000
35,000
2035-2050
30,000
2020-2035
25,000 2006-2020
20,000
15,000
10,000
5,000
0
China India United Brazil Mexico Indonesia Russia United Germany Japan
States Kingdom

10. Working Age Population Growth Rates (% p.a.)
% p.a.
1.00%
0.50%
0.00%
-0.50%
-1.00%
-1.50%
Source: PwC Report

11. Hedge Funds in India
Cater to
Essentials for
Individual
Investors HFs
Second Registration
First Implication
Implication
Uncorrelated Increase in Independent
returns demand audit
Surge in Increase
Transparency
earnings competition
Reducing Proper
investment fees disclosure

12. Performance of Indian Hedge Funds
• $44,000 million AUM (assets under management) of all Indian hedge
2006 funds
• India’s high beta market generate effective returns.
• Bull Run
2007 • Q-India, Halbis, Baer Capital, Insynergy & FMG outperformed major
hedge fund indices.
• Experiment with complex strategies, resulted hard on the returns.
2008 • India index was the worst performing index with loss of around 50%.
• More cautious in year 2009 and 2010
2009 • Taking some worthwhile sectors and stock calls
• Gloomy picture of hedge fund success
2010 • First 7 months having almost deep losses and very bleak returns
• Funds which focused on inflation sensitive India gained around
15.48% according to HFRX India index

13. Various Hedge Fund Strategies
• Emerging Markets
– Invest in emerging markets
– Emerging markets offer less options for short selling, so these are
mostly long biased and employ growth or value approach to investing
in equities.
– These can be illiquid & carry a high risk due to correlation of emerging
economies.
• Convertible Arbitrage
– Make profit from arbitrage of convertible securities
– Make money from mispricing & volatility
– Usually buy a convertible bond, and take a short position in underlying
equity.
• Long- Short Equity
– Base strategy of the initial hedge fund formations by Jones.
– Hedging portfolio of longs by portfolio of shorts.
– Main focus on the stock picking opportunities.

14. Various Hedge Fund Strategies
• Global macro
– Invest in developed as well as developing countries.
– Enough flexibility. Can invest in any security in any market where
there is an opportunity.
• Event Driven
– Focus on events of corporate life cycle like
acquisitions, buybacks, demerger, spin-offs etc,.
• Merger/Risk Arbitrage
– Focus on the companies which are going through any merger or
takeover
– Both the acquiring company and the target.
– The risk is deal risk rather than a market risk.

15. Various Hedge Fund Strategies
• Distressed Securities
– Buying the bonds or securities of companies facing or
approaching bankruptcy or restructuring
– Tries to benefit from the price movement of these securities.
• Equity Market Neutral
– Market timing rather than stock picking.
– Taking long and short position in the undervalued and
overvalued securities
– Has low volatility.

16. Some Other Strategies
• Fixed Income Arbitrage
-Seeking arbitrage opportunities in in Fixed Income Securities
-Interest rate arbitrage
-Use of derivatives like Interest Rate futures, Caps, floors etc.
• Managed Futures
-Strategic investment or arbitrage in futures(usually Commodities and Currency)
-Spot-future arbitrage
-Contango and Backwardation arbitrage
-Calendar spread in futures
• Market Directional
-Market momentum strategy
-for very short term
-example is Jobbing

17. HFRX 10 09 08 07 06 Avg Stdev Min Max Rank
Returns
Global Hedge 5.19 13.4 (23.25) 9.26 2.72 1.46 14.40 (23.25) 13.4 7
Fund
Equal Weighted 5.29 11.44 (21.9) 8.83 1.28 0.99 13.35 (21.9) 11.44 8
Strategies
Absolute Return (0.12) (3.58) (13.09) 7.43 (0.03) (1.88) 7.45 (13.09) 7.43 11
Market 9.32 29.34 (29.7) 10.45 4.2 4.72 21.48 (29.7) 29.34 2
Directional
Convertible 8.76 42.46 (58.37) 9.57 (5.69) (0.65) 36.77 (58.37) 42.46 10
Arbitrage
Distressed 8.34 (5.6) (30.69) 9.56 1.21 (3.44) 16.41 (30.69) 9.56 12
Securities
Equity Hedge 8.92 13.14 (25.45) 9.23 4.19 2.01 15.67 (25.45) 13.14 4
Equity Market 2.64 (5.56) (1.16) 4.76 0.21 0.18 3.93 (5.56) 4.76 9
Neutral
Event Driven 1.98 16.59 (22.11) 10.32 2.81 1.92 14.70 (22.11) 16.59 5
Macro (1.73) (8.78) 5.61 5.61 6.67 1.48 6.64 (8.78) 6.67 6
Merger 5.69 8.14 3.69 10.73 3.72 6.39 3.03 3.69 10.73 1
Arbitrage
Relative Value 7.65 38.47 (37.6) 10.65 (0.97) 3.64 27.39 (37.6) 38.47 3
Arbitrage

18. Dow Jones Credit Suisse 10 9 8 7 6 Avg Stdev Min Max Rank
indices
Convertible Arbitrage 0.9 3.24 -2.79 0.11 1.04 0.50 2.18 -2.79 3.24 7
Emerging Markets 0.81 2.04 -2.19 2.51 1.8 0.99 1.89 -2.19 2.51 1
Event Driven 0.6 1.6 -1.46 1.64 1.03 0.68 1.27 -1.46 1.64 6
Fixed Income Arbitrage 0.38 0.3 1.01 1.29 0.86 0.77 0.42 0.3 1.29 3
Global Macro 0.69 0.48 0.98 1.21 0.39 0.75 0.34 0.39 1.21 4
Long/Short Equity 0.58 1.47 -0.85 1.5 1.02 0.74 0.97 -0.85 1.5 5
Managed Futures 1.14 -1.08 2.29 1.39 0.99 0.95 1.24 -1.08 2.29 2

19. HF strategies and Systematic risk
exposure

20. Evolution of HF strategies

21. Modern day HF strategies

22. HFRX
• The “Hedge Fund Research Index”
• Most Widely followed index for Hedge Fund Performance
• It is comprised of all eligible hedge fund strategies. All
strategies are equally weighted.
• Evaluates the performance of Hedge Funds based on Absolute
Return and the Relative Risk.
• As a component of the optimization process, the index
selects constituents which exhibit lower volatilities and lower
correlations to standard directional benchmarks of equity
market and hedge fund industry performance.
• “HFRX India” is an index for the Indian Hedge Funds.

23. Empirical Findings
• Returns are considerably high during a volatile market which
is mean reverting in nature
• Returns during a trending market in some of the HF strategies
is low and even negative in some cases
• Well established and High Corpus HFs give a lower returns
compared to the relatively newer peers who have small
corpus

24. How does size matter?

25. John Paulson
(HF: Paulson and Co.)
His claim to fame is his pay check for 2007: he is reported to have made $3.7 billion.
Strategy: Short-selling sub prime mortgage
He made a profit of $15 billion for his investors in 2007. His flagship fund generated a
return of 599%.
In 2010, he beat a hedge-fund record by making nearly $5 billion
His Flagship Fund (Paulson Advantage Fund) was down by 40% as on Sept. 2011

26. George Soros
(HF: Soros Fund Management)
Short sold 10 Billion pounds in 1992 and made 1.1 Billion $ in a single day
(Black Wednesday)
Similar speculation over the currency of Association of Southeast Asian
Nations (ASEAN) in 1997
As of March 2012 Soros was listed 22nd in Forbs among the richest people in
the world

27. Christopher Hohn
The hedge fund he manages reportedly lost $1 billion in a single month, June
2008. The size of his hedge fund went from $8 billion to $7billion.
Interestingly Hohn was a topper at HBS.
Other smart people who lost money through Hedge Funds are the Noble
Laureates Myron S. Scholes and Robert C. Merton (The LTCM case)

28. Hedge Fund Regulations In India
• SEBI regulation seeks to cover all types of funds broadly under 3
categories
• Category I AIF – those AIFs with positive spillover effects on the
economy
• Category II AIF – those AIFs for which no specific incentives or
concessions are given by the government or any other Regulator;
which shall not undertake leverage other than to meet day-to-day
operational requirements
• Category III AIF – those AIFs including hedge funds which trade with a
view to make short term returns; which employs diverse or complex trading
strategies and may employ leverage including through investment in listed
or unlisted derivatives.

29. Regulatory Constraints
• Restricting participation:
The Alternative Investment Fund shall not accept from an investor
an investment of value less than rupees one crore. Further, the AIF
shall have a minimum corpus of Rs. 20 crore.
• Avoiding wealth concentration hazards:
The fund or any scheme of the fund shall not have more than 1000
investors
• Preventing Conflict of Interest:
For a Hedge Fund, the continuing interest shall be not less that 5%
of the corpus or rupees ten crore, whichever is lower.

30. Regulatory Constraints (contd..)
• Trading in Secondary Market:
Units of AIF may be listed on stock exchange subject to a
minimum tradable lot of rupees one crore. However, AIF shall not
raise funds through Stock Exchange mechanism
• Against Concentration Alpha and Speculation:
Hedge Funds shall invest not more than 10% of the corpus in one
Investee Company.
• Preventing Moral Hazard:
AIF shall not invest in associates except with the approval of 75%
of investors by value of their investment in the Alternative
Investment Fund

31. The Category III of AIFs (the Hedge Funds)
• Proper disclosure:
Category III Alternative Investment Funds shall ensure that
calculation of the net asset value (NAV) shall be disclosed to the
investors at intervals not longer than a quarter for close ended
Funds and at intervals not longer than a month for open ended
funds.
Category III Alternative Investment Fund shall provide quarterly
reports to investors within 60 days of end of the quarter.

32. Thank You 