World over, money moves fast through markets thanks to hedge funds. In India, authorities are scared to allow these absolute-return creatures — dubbed ‘Masters of the Universe’ — because of the clout they wield. The government has till now preferred foreign investor participation through the participatory notes route. A source working for a foreign institutional investor told DNA Money that Sebi should at least allow hedge fund money to come in now or the market will be on weak legs. Hedge funds and PNs come in only to benefit from the leverage opportunity available in the derivatives segment. It will thus be prudent to quickly legalise hedge funds, treat them as FIIs and get the money back into the country. Prima facie, the Sebi proposals are to plug two loopholes — thwart hot money, and know the identity of the investor. The last time such a move was hinted at — on January 20, 2004 — the market fell a total 8% in three days to January 22, only to recover most of it in the next two after the government clarification came. (DNA India)   more »

SEBI has suggested that foreign institutional investors should be barred from issuing or renewing offshore derivative instruments linked to the futures and options markets. Offshore investors would be required to extinguish existing participatory notes linked to them in 18 months, the regulator said. It has sought a response to the proposals by Oct. 20. Offshore instruments such as participatory notes, known as P-Notes, are derivatives that are sold by brokers to investors who aren't registered with India's stocks regulator. The value of the notes are based on the underlying stocks. More than half of the $17 billion of flows into Indian stocks this year may have been through the use of the so-called participatory notes, JPMorgan Chase & Co. wrote in a research report today. The notes, which change in value depending on the performance of the underlying securities, provide hedge funds anonymity in their investments. The notional value of participatory notes outstanding increased 11-fold to 3.53 trillion rupees ($89.8 billion) as of August this year from 318.8 billion rupees in March 2004, the regulator said. ( Bloomberg)   more »

Global hedge funds, which are on the lookout for multi-fold returns on their investments, are slowly entering the booming domestic real estate sector. Major hedge funds operating in the Indian property markets include Och-Ziff Capital (founded by hedge fund legend Dan Och), New Vernon Capital, Farallon Capital Management (the world’s largest single-manager hedge fund), Marathon Realty, DE Shaw and Tiger Global (a $1.4 billion hedge fund run by ex-principals of legendary trader Julian Robertson’s Tiger Management). Hedge funds invest in the real estate sector through three routes, namely, through the purchase of equity stakes in listed/unlisted property developers, by direct participation in real estate projects or by putting a part of their funds into real estate funds floated for the Indian market, according to senior industry officials. Though hedge funds do not have India-dedicated funds, they invest in the Indian market from their global or the Asia-Pacific funds. According to industry estimates, about $1.6 billion private equity/hedge funds investments have been made in the real estate sector last year (Jan-Dec). It is expected to cross $2 billion this year. Some of the hedge funds’ investments in India include New Vernon’s commitment of $250 million to the real estate sector from its $2 billion India-dedicated fund, DE Shaw’s $400 million investment in DLF Assets, which will develop SEZs across the country, Och-Ziff Capital’s 25 per cent stake acquisition in Nitesh Estates, a Bangalore-based real estate developer, for $51 million. Farallon has been a big investor in the Indiabulls Group, a big player in the property sector.   more »