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Hedge funds go short with FII help

With stock prices in a free fall, India-obsessed hedge funds that were pushing up the market to dizzying levels are now looking to benefit from the slide by going short on India.

Many of them are said to be doing so by borrowing shares from foreign institutional investors (FIIs) allowed to issue participatory notes, and then dumping those shares in the market. So far in 2008, FIIs have net sold $6.5 billion worth of shares, and a sizeable portion of those sales are believed to have been punched in by hedge funds.

Market observers are not sure if the recent bout of sales by hedge funds is a result of redemption pressure or arising from a certain market strategy.

“The five to 10-year picture still looks good. It is the next 6-12 months which is a question mark,” said Parth Gandhi, MD of Vision Global Investments, a hedge fund. He is of the view that for a long-only fund, the equities market at these levels provide attractive bargains. “The trick is to identify one’s risk profile and thereafter look at individual stock positions one has,” he added.
Experts say the trend is consistent with the theme of lower-risk tolerance driving sentiment across the globe, coupled with weakness in stock markets and the economy.

“A lot of hedge funds are highly leveraged and those that are not India-dedicated funds but Asia-focused, are pulling funds out of India to invest elsewhere,” said the head of a India-dedicated hedge fund. Flows to other market is said to be anywhere between positive and lesser negative. Yet another fund manager who is in the market to raise money for a hedge fund, says the attitude is one of wait-and-watch.
“Most global hedge funds are short on emerging markets. The focus is very much on commodities and that is likely to be the case for sometime,” said Baer Capital MD Alok Sama. Credit concerns are not only governing investment decisions of hedge funds but have also left their mark on the industry.

As per Hedge Fund Tracker, the number of hedge funds shutting down rose by 20% in the first quarter of 2008 as credit crunch hit performance in the $2-trillion industry. The Hedge Fund Research’s June data reveals that there were also the fewest new fund launches since 2000, as nervous investors favoured larger, more established firms.

There were 170 hedge funds liquidated during the first quarter of 2008, compared with 138 in the same quarter last year. The attrition rate — the number of funds shut down as a percentage of total funds — was 1.68% in the first quarter, up slightly from the same period a year ago, HFR reported. The industry saw 247 new funds launched in the first quarter, down from 251 a year earlier.

The peak year for hedge fund launches and liquidations was 2005, when 2,073 new funds were started and 848 funds were closed down. During the first quarter of this year, a net 77 new funds were formed, HFR said. As per reports, hedge funds have been hit by the global credit crunch, with some managers resorting to fire sales to meet margin calls from brokers. Managers tracked by HFR are said to have generated 0.11% returns on average through the end of May, the worst start for several years.

Source: Economic Times

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