The Indian hedge fund sector is one of the smallest in Asia, partly because tight rules make it hard to set up domestic hedge funds and burden access for foreign players, often forcing them to use cumbersome investment tools.
"The Indian hedge fund industry started later because of a lack of feasible instruments ... But the fact that it is small now doesn't mean it's going to be small tomorrow," Peter Douglas at GFIA, a hedge fund research firm, told Reuters.
Hedge funds active in India were meeting at a conference in Geneva, a large financial centre for private banks, which often invest in hedge funds on behalf of their clients.
Indian hedge funds manage some $3 billion in assets, according to GFIA, out of $160 billion in Asian hedge funds, while only 50 out of 800 Asian funds focus on India. Worldwide, hedge funds are estimated to manage up to $2 trillion.
The number of hedge funds in India may grow by some 20 percent each year, Douglas said, and the amount of assets they manage at an even higher rate, boosted by lively demand from private and institutional investors.
"The market will get kicked off in a big way (through) fund of hedge funds," said K.N. "Vaidy" Vaidyanathan, Chief Executive Officer at Alchemy Capital Management, referring to funds that invest in other hedge funds.
"Then endowments, proprietary investors and family offices will start making the big push," said Vaidyanathan, whose company manages some $210 million in client assets.
That meant assets under management in Indian hedge funds could soar to anything between $50 and $100 billion in the next three years, he said.
JUMPING HURDLES
Financial institutions with a recognised status as a foreign institutional investor (FII) can operate as a hedge fund in India, where the stock market has been on a multi-year rally, if they are regulated in their home market.
But smaller players clearly labelled as hedge fund could have a hard time getting regulatory access to the market even if they were home-regulated, market participants said, forcing them to trade equity through proxy shares.
However, financial regulators were slowly giving the industry more leeway, they said.
"(The regulator) has now allowed existing mutual funds to launch long-short hedge funds also ... There is now scope for the domestic investor to come into those investments," said Sanjay Sinha, at SBI Funds Management Private Ltd.
Strategically, hedge funds were largely seeking to benefit from a protracted bull run in the Indian stock market -- which has risen more than 40 percent both last year and in 2005 -- while at the same time reducing volatility.
That is in contrast with hedge funds in less bullish markets, which often look for so-called absolute returns, regardless of whether the markets goes up or down.
"If you become market-neutral you miss the entire growth and then what's the point of investing in India," said Alchemy Capital Management's Vaidyanathan.
"You might just as well look for a risk-adjusted 8 to 10 percent in a developed market. But you come to India because it gives you an opportunity to do a 25-30 percent return, and maybe more," he said.
Source : NDTV Profit