This document analyzes hedge fund strategies in India. It discusses what hedge funds are and their investment approaches. Several hedge fund strategies are evaluated based on their returns from 2006-2010 using the Hedge Fund Research Index and Dow Jones Credit Suisse indices. Merger arbitrage and market directional strategies performed best according to the HFRX index, while emerging markets and managed futures strategies led in the Dow Jones index. Convertible arbitrage ranked lowest in both indices. Indian hedge funds saw strong growth and returns improved in 2010.

1. An Empirical Study of
Hedge Funds in India and
its Strategies
Ms. Parul Kumar
JIMS, Rohini,
New Delhi

2. Hedge Funds
 “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,
◦ opened to limited number of investors
◦ require high investment
◦ include large number of expertise based
investment strategies
◦ broad range objectives of risk and return.

3. Hedge Funds Contd.
They can invest in any type of opportunity luring in
the any market,
 be it options,
 derivatives,
 equities,
 bonds,
 undervalue securities,
 currencies,
 situations such as mergers or bankruptcies,
 domestic as well as international markets etc,
where they can expect to receive attractive returns
in all kind of risky situations.

4. Main motive of Hedge Funds
 Protecting capital (i.e. the private pool
of funds)
 Generating superior returns in all
kinds of markets (i.e. even they
promise takings in bearish markets)
 While attempting to minimize the risk
i.e. to hedge.

5. Annualized Hedge Funds Return (2000 –
2009)
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

6. Objective
Second
First Objective
Objective
• How hedge • Which hedge
funds have set fund strategy
their mark in has proved to
India be best globally
• Lucrative in the last 5
opportunities in years i.e. from
India year 2006-
2010.

7. Hedge Funds in India
 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. Hedge Funds in India (Contd.)
 Investment can be made through FII
(Foreign Institutional Investors) route.
 1% management fees of the
investment amount
 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
Source: Goldman Sachs Report

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 Also has cost
Individual
Investors to it
First Second Registration
Implication Implication
Uncorrelated Increase in Independent
returns demand audit
Surge in Increase
Transparency
earnings competition
Loose charm for Reducing
Proper
other investment investment
avenues disclosure
fees

12. Performance of Indian Hedge Funds
• $44,000 million AUM (assets under management) of
2006 all Indian hedge 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 sectoral and stock calls
• Gloomy picture of hedge fund success
• First 7 months having almost deep losses and very
bleak returns
2010 • Funds which focused on inflation sensitive India
gained around 15.48% according to HFRX India
index

13. 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.
 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.
 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.
◦ These can be illiquid & carry a high risk due to correlation of emerging
economies.

14. Hedge Fund Strategies (Contd.)
 Event Driven
◦ Focus on events of corporate life cycle like merger and
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.
 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.

15. Methodology
 Use of secondary data
◦ Related to the returns (ROR)
◦ Various hedge fund strategies
 Average of returns from year 2006-2010 are taken
into consideration
◦ conclude the ranking of each strategy
◦ comparison from the data extracted from Hedge funds
research and Dow Jones Credit Suisse indices.
 12 strategies from Hedge fund research indices
 7 strategies from Dow Jones Credit Suisse indices
 Risk levels are measured through standard
deviation between last 5 years.

16. Table I: Hedge Fund Research Index (HFRX) Returns, 2006-2010
HFRX Returns 10 09 08 07 06 Avg Stdev Min Max Rank
Global Hedge Fund 5.19 13.4 (23.25) 9.26 2.72 1.46 14.40 (23.25) 13.4 7
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 Directional 9.32 29.34 (29.7) 10.45 4.2 4.72 21.48 (29.7) 29.34 2
Convertible Arbitrage 8.76 42.46 (58.37) 9.57 (5.69) (0.65) 36.77 (58.37) 42.46 10
Distressed Securities 8.34 (5.6) (30.69) 9.56 1.21 (3.44) 16.41 (30.69) 9.56 12
Equity Hedge 8.92 13.14 (25.45) 9.23 4.19 2.01 15.67 (25.45) 13.14 4
Equity Market Neutral 2.64 (5.56) (1.16) 4.76 0.21 0.18 3.93 (5.56) 4.76 9
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 Arbitrage 5.69 8.14 3.69 10.73 3.72 6.39 3.03 3.69 10.73 1
Relative Value 7.65 38.47 (37.6) 10.65 (0.97) 3.64 27.39 (37.6) 38.47 3
Arbitrage

17. Table II: Dow Jones Credit Suisse Hedge Fund Indices Returns, 2006-2010
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 s 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

18. Findings
Hedge Fund Research Index Dow Jones Credit Suisse
index
1. Merger Arbitrage with return 1. Emerging Markets (return
of 6.39% +0.99%)
2. Market directional with 2. Managed futures (return
return of 4.72% 0.95%)
3. HFRX index returns for
emerging markets is 17.12
% for 2010
4. HFRX India Index returns
is 15.47% for 2010
• Convertible Equity Arbitrage ranked last on the basis of
return in both the indices
 strategy need to be evaluated further
 limited options available for convertible securities