An Empirical Study ofHedge Funds in India and its Strategies Ms. Parul Kumar JIMS, Rohini, New Delhi
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.
Hedge Funds Contd.They can invest in any type of opportunity luring inthe 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 returnsin all kind of risky situations.
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.
Annualized Hedge Funds Return (2000 – 2009)40% Bear Market Achievers Riding Asset Growth Crisis30%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
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.
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.
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.
Incremental Nominal GDP in billion US $40,00035,000 2035-205030,000 2020-203525,000 2006-202020,00015,00010,000 5,000 0 China India United Brazil Mexico Indonesia Russia United Germany Japan States Kingdom Source: Goldman Sachs Report
Working Age Population Growth Rates (% p.a.)% p.a. 1.00% 0.50% 0.00% -0.50% -1.00% -1.50% Source: PwC Report
Hedge Funds in India Cater to Also has cost Individual Investors to it First Second RegistrationImplication 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
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
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.
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.
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.
FindingsHedge Fund Research Index Dow Jones Credit Suisse index1. 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 20104. 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