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Shortsighted hedge funds feel heat

Hedge funds are running scared of governor YV Reddy. It is not because he is an inflation hawk. It is because his ‘no-surprises’ credit policy resulted in such a positive jump in the stock market that many hedge funds that introduced a short-bias in their strategy have had to unwind those positions and go back to long-only strategy in India.

As the name suggests, most hedge funds follow investment strategies that allow them to smoothen out volatility of their portfolio by using forwards or futures. These funds face two constraints in Asian markets. One, many markets such as Hong Kong and Singapore provide no single-stock future instrument to short — selling an asset who price is expected to fall — a stock. The other constraint is a bull market that has run for almost four years. When prices are rising and the expectation is that they shall continue to do so, shorting can be suicidal from a financial point of view.

This is the reason most funds have been following a long-only strategy. “Most hedge funds operating in India have bought with a three-year horizon in mind,” says a hedge fund advisor. When the market fell in February though, many thought that the bull streak had snapped and the weakness would continue so they changed their strategy.

They introduced a short-bias on a certain part of their portfolio. “Some funds that have had an exposure of 30% to Asia may have moved about 5-6% of that allocation on a short position through index futures,” says the head of the India desk of a hedge fund.

Unfortunately, the Indian market picked up steam again early this month. And with RBI willing to adopt a wait-and-watch approach the markets moved up again. This also moved many short positions opened at the end of last month or early April in the futures market into a loss. Estimates would suggest a loss of about $150,000 approximately on a short position of $1 million. Hence, all hedge funds had to quickly give a short shrift to the “short” strategy and would prefer to go long on Indian market.

Source : Economic Times

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