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India hedge fund down 22 pct in 2008

A downdraft in the Indian stock market is hammering returns for a hedge fund operated by Boston-based Venus Capital Management, reflecting the challenges of investing in volatile emerging markets.

The Venus Special Situations Fund, a $100 million long-short hedge fund focused only on India, is down 22.25 percent in the first half, according to a July 15 investor note obtained by Reuters.

The performance of the fund comes amid a sharp fall this year in Indian stocks, with the S&P CNX Nifty index of 50 stocks down nearly 40 percent in dollar terms through June.

Vic Mehrotra, CEO and founder of Venus Capital, said he is positioning the portfolio for more market declines this year in India, where investors are worried about higher oil prices, inflation and political turmoil.

In an interview, Mehrotra said he expects Indian markets to fall another 10 percent to 20 percent or more this year, which would claim casualties among the 120 or so dedicated India hedge funds, which he said collectively have about $6 billion under management.

“There's a lot more pain to come in India's hedge fund industry and many will go out of business,” Mehrotra said. “The whole hedge fund industry is going through a process of deleveraging.”

Venus Capital, founded in 1994, has about $550 million in three funds and bills itself as the oldest India-focused hedge fund group. Not all its funds are suffering: its $420 million flagship Venus Arbitrage Fund is up 2 percent in the year through June, according to Mehrotra.

Mehrotra said the Special Situations Fund has faced some redemptions, or demands for capital return by investors, but the fund has been able to pay them. He said he expects the markets to start rising by early next year.

“We are very market neutral and willing to take a certain amount of volatility to make longer term gains,” he said. “Longer term, we're fairly positive about India but this macro situation will have to play itself out.”

For hedge funds, the Indian stock market is hampered by restrictions on shorting individual stocks, or betting on their declines. This forces many to use domestic and international futures markets to balance portfolios, experts said.

“It is difficult to do shorting in India,” said Ferenc Sanderson, senior hedge fund analyst for Lipper Inc, a unit of Thomson Reuters. “A lot of these long-short funds are very long-biased. So you get what the market gives you.”

The Special Situations Fund's largest allocation is to the energy sector and its biggest holding, Reliance Industries Ltd , owns the largest natural gas fields in India.

Mehrotra said he has high hopes for Reliance, which is gearing up to open a new pipeline this year, predicting the stock will double in the next two years.

“The company will be a cash machine once their pipeline starts to pump gas,” Mehrotra said.

Source: Reuters

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