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India-focused hedge funds fare better

Indian stocks have emerged as the most attractive bet for hedge funds, the fall guys during the recent subprime crisis, with returns better than that of the Sensex. According to a study of over 7,000 hedge funds across the world, those focused on India have emerged on top in the past five-and-a-half years.

International hedge fund tracking firm HedgeFund.Net (HFN) said in its study, India-focused funds generated an average return of 3.09% during July this year — a month when most of the developed markets moved downward. Besides, in the first seven months of this year, these funds have recorded an average return of 19.6% against a fall of over 22% in Sensex during the same period.

HFN vice-president Peter Laurelli, the author of the report, said the average return of India-focused funds were 53.63% in the one-year period through July, which outpaced 44.74% rise in the Sensex during same period. The report said the outperforming of the local benchmark by India-focused funds is a new development and the scenario has reversed in comparison with the 2005-06 period.

The average returns on Indian funds were 21% and 27.86% in 2005 and 2006, respectively, whereas the Sensex returned 42.33% and 46.7%, respectively, during the corresponding periods. Since 2001, these funds have recorded an annual compound rate of 18.44% against 23.04% for Sensex.

India’s returns lagged other emerging markets through much of 2001-02 due to stock market scams and problems associated with investment scheme of state-owned Unit Trust of India US 64, the report said. According to HFN, the percentage of hedge funds investing in India stood at 3.09%, ahead of Brazil (2.5%) and Eastern Europe (2.97%) focused funds at the end of July. China-focused funds had a higher percentage of 7.45%.

The estimated total assets in India-focused hedge funds stood at $13.97 billion in the second quarter of 2007, representing nearly five-fold increase from the level in third quarter of 2005, the report noted.
Hedge funds are currently investing in Indian stocks mostly through Participatory Notes issued by the Foreign Institutional Investors (FIIs) registered in the country.

The country’s market regulator Sebi chairman M Damodaran said in an interview earlier this month that hedge funds were welcome to the market, provided they comply with the existing FII guidelines and they should come through the front door. There are no specific guidelines for hedge funds as a separate investor class in India.

Mostly prevalent in developed markets like the US, these funds are generally used by wealthy individuals and institutions, adopt aggressive investment strategies and are exempt from rules and regulations governing other mutual funds provided the number of investors is not more than hundred.
Source: Economic Times

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