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Risk-reward ratio is looking very attractive: Hedge funds

As the Indian market went into a tailspin yet again on Friday, the finger of blame once again pointed to leveraged hedge funds, which are trying to cut their losses and run. But some global fund managers and hedge fund officials maintain the crash was accentuated by too many leveraged players rushing for the exit door at the same time, and not just hedge funds alone.

“Money is flowing out of every emerging market, not only in India. How does one differentiate between a hedge fund and local mutual fund selling,” asks Amit Bhartia, partner, GMO (Grantham, Mayo, Van Otterloo), a global institutional money management firm managing $120 billion of assets.

“For any country today, you need serious policy action to stop the carnage. What is worrying is that in a country like India, actions are more reactive than proactive. What is the need of the hour is a serious statement and policy action by government to jump-start infrastructure and maintain growth,” he adds.

So far in 2008, foreign institutional investors (FIIs) have pulled out over $10 billion from Indian equities at the net level. “In the very short term, there are redemption pressures on domestic mutual funds and hedge funds which have to raise cash.

Offshore hedge funds are increasing cash ahead of redemptions which they have to pay at the beginning of the next quarter ie January 2009,” said Sam Mahtani, director of emerging markets at F&C Investments which helps manage $2.8 billion in global emerging markets.

As per a recent analysis by Credit Suisse, hedge funds are sitting on close to $800 billion in cash. On India, Mr Mahtani is of the view that the stock market is likely to remain volatile over the next few weeks and the market is close to a bottom, thereby presenting attractive buying opportunities.

“We believe the risk-reward ratio is looking very attractive, as we are close to crisis level types of valuations. We see a 5-10% potential downside from here, while the potential upside could be between 30-40% for anyone with a twelve month view. If any one is willing to take a long-term view, this is an extremely attractive time to buy India,” he added.

Mr Mahtani is betting on frontline. “Once sentiment changes, local and foreign investors will go back into big stocks. Mid-caps, however, could continue to be under pressure.”

Source: Economic Times

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