Some hedge funds seem to resorting to currency arbitrage under the pretext of equity investments, if the FII inflows of $1.2 billion in a mere three days are anything to go by. Hedge funds - known for their high-risk, high-return short-term investment plays - are taking bets on the upward and downward movement of the rupee against the dollar under the pretext of investing in equities. Hedge funds do not register with the Securities Exchange Board of India (SEBI), but take the participatory note (P-note) route to dabble in the stock markets. The foreign institutional investor (FII) norms are thus not applicable to them. Overseas funds cannot take naked positions, but only hedge their risks in Indian forex market. As on July 31, 2007, 28 FIIs issued P-notes whose cumulative outstanding notional value stood at $86.26 billion. This is nearly 40 per cent of the value of foreign portfolio investments in India. The Reserve Bank of India (RBI) rules do not permit the hedge funds to take a call on the Indian forex market. So when they expect the Indian currency to appreciate, they invest or park funds in equities, and book profits when the targeted forex rates are achieved.   more »

Indian stocks have emerged as the most attractive bet for hedge funds, the fall guys during the recent subprime crisis, with returns better than that of the Sensex. According to a study of over 7,000 hedge funds across the world, those focused on India have emerged on top in the past five-and-a-half years. International hedge fund tracking firm HedgeFund.Net (HFN) said in its study, India-focused funds generated an average return of 3.09% during July this year — a month when most of the developed markets moved downward. Besides, in the first seven months of this year, these funds have recorded an average return of 19.6% against a fall of over 22% in Sensex during the same period. HFN vice-president Peter Laurelli, the author of the report, said the average return of India-focused funds were 53.63% in the one-year period through July, which outpaced 44.74% rise in the Sensex during same period. The report said the outperforming of the local benchmark by India-focused funds is a new development and the scenario has reversed in comparison with the 2005-06 period.   more »

They may be getting roiled across the world markets, but in a relative sense, the much admired and criticised hedge funds have had a good run in India in July and August, when the funds were subject to turmoil worldwide in the wake of the subprime loan crisis, and also much of this year. HedgeFund.net (HFN), an agency that studies the flows and returns of some 7,000 hedge funds, says India-focused hedge funds outperformed the benchmark Sensex in August, and also in a one-year view to July. “Funds investing in India’s markets typified the dislocation of returns to regional/country equity benchmarks seen in August. In the three months prior to August, funds investing in India returned an average of +12.39 per cent, slightly outperforming the Sensex which was +12.10 per cent,” HFN analyst Peter Laurelli said. In the crunch week of mid-August when bad news on high-risk sub-prime lending shook global markets, the Sensex slid 6.75 per cent, and despite rallying 9.5 per cent ended the month down only slightly, while the average India focussed fund was down 4 per cent in August, Laurelli said.   more »

India-focused hedge funds, which are now clearly the talk of town, have delivered a return of 19.6 per cent so far this year and are one of the best performing groups of hedge funds in the last five and a half years, says a study by Hedge Fund Net (HFN) — a tracker of such funds. In the last 12 months through July, the average return for India-focused hedge funds was 53.6 per cent, dwarfing the 45 per cent return on the Sensex. Hedge Fund Net, which tracks over 7,000 funds the world over, estimated that the total assets managed by hedge funds investing primarily in Indian markets were at $13.97 billion at the end of the second quarter. This number has moved up five-fold from $2.8 billion in the latter part of 2005, when such investments began to gain a lot of traction. This sharp increase was a likely result of these funds delivering high returns in 2004, says the report. Since the third quarter of 2005, the average cumulative return produced by these funds was estimated over 72 per cent.   more »

Citigroup Inc.’s hedge fund unit Old Lane LP plans toinvest Rs 1.06 billion ($26 million) in India’s KVK Energy & Infrastructure Pvt., as the world’s second-fastest pace of economic growth lures investors. Old Lane, bought this year by Citigroup, may acquire 26 per cent of KVK Energy, which builds power projects, company secretary Ram Mohan said in a telephone interview from Hyderabad, where KVK Energy is based. He didn’t give a timeframe.   more »

Market regulator Securities and Exchange Board of India (Sebi) says hedge funds are welcome to invest in India, provided they comply with the existing regulations for foreign institutional investors (FIIs). "Why should we be worried about hedge funds... We are not making any separate set of regulations for them... They have been investing in India through participatory notes. All we are telling them is if you want to come here, come through the front door," M Damodaran, chairman, Sebi told PTI in an interview. "Hedge funds started as a normal class of investors. Over time, they became large with large investors started putting their money in these funds," Damodaran said. Hedge funds are generally speculative funds managing funds for private investors and also collect a part of the profit, beside a management fee from the investors.   more »

It's not difficult to fathom why SEBI chairman M Damodaran is hell-bent on getting guidelines in place to regulate - at least partially - hedge funds in India. Total assets in hedge funds investing primarily in India's markets have risen 400 per cent to $13.97 billion as of July-end 2007 from $2.8 billion at the end of the third quarter of 2005, said HedgeFund.Net, a firm that tracks hedge fund investments. Since over 90 per cent of such funds invest in Indian equity, that's almost one-fourth of the net cumulative investments by foreign institutional investors into the asset class during the period. The interest in India is not without its reasons: "Hedge funds investing in India trail only China as the best performing region or country of investment focus," says the report. This is in stark contrast to 2001-2002, when returns in India lagged those of other emerging markets, especially on account of mistrust in India's markets due to the various stock market scams and the bust-up of US-64, the investment scheme of what was then the Unit Trust of India. In 2001, the average annual returns of the entire hedge fund space tracked by HedgeFund.Net was 11.42 per cent, while that of India-focused funds was a negative 44.12 per cent.   more »

Institutions, who were unwilling to touch IFCI with a barge poll even a few years ago, now want to buy a stake in the company. Soon it will be clear whether such interests are genuine, or the hype around the scrip is only to help some operators who have built up positions to make a killing. The latest buzz is that the US-based hedge fund DE Shaw has joined the race for acquiring a strategic stake in IFCI, India’s oldest state-owned financial institution. DE Shaw, with assets worth over $30 billion, is believed to have put in bids in response to IFCI’s decision to sell a 26% stake in favour of strategic investors, said sources. When contacted by ET, DE Shaw country head Anil Chawla said: “I do not comment on my investments.” Apart from DE Shaw, a host of other leading investors are also reportedly contending for the IFCI pie. Blackstone, Citigroup, Barclays and Standard Chartered Bank figure prominently among the possible foreign suitors. Besides some of IFCI’s investments which have grown in value, the stock is thriving on the story that there is a real estate play underlying several dud loans of IFCI.   more »

Hedge fund guru and world-renowned art collector Nicolas Berggruen sits at the helm of a more than $1 billion (Rs4,100 crore) fund, which has put a minimum of $300 million in India. The difference between his fund and the hundreds of other funds flooding India is that he has no investors to solicit or answer to. Berggruen Holdings Inc. invests Berggruen’s own money, which he has grown over decades from an initial pool of family money that he describes as “modest”. The proprietary funds give him an advantage, says the Paris-born German who resides part of the year in New York and the rest in various other cities across the world. Berggruen can nimbly make investments across all asset classes, including private equity deals, seed funding, real estate development, fund-of-funds, public market securities, hedge funds, and industrial project investments. He can infuse more funds as needed and stay invested without artificial exit requirements set by investors who need their money back. And the economic ups and downs that impact investors of funds, such as the subprime crisis that has hit the US with an international ripple effect, will not be a problem for him. In fact, it could well be an advantage for him in India. Berggruen says, “Less liquidity means less competition.” Although India is not a top market for the fund, which has offices across the US, Europe and Asia, with heavy investment in the former two, Berggruen has high hopes to be a part of growing India.   more »

US-based Avenue Capital, a hedge fund that focuses on distressed and undervalued debt and equity opportunities, is in an advanced stage of negotiations to pick up an equity stake in Delhi-based loss-making pharma company Morepen Laboratories. Sources indicated that Avenue Capital could pick up 15% stake for around Rs 80 crore, and the deal which is expected to be completed by the middle of this month. The fund is offering Rs 20 per share of Morepen Labs, which works out to a 28% premium to Friday’s market price of Rs 15.6. However, it is about 40% higher than the share price when negotiations between the two began. When contacted, Morepen Laboratories chairman and managing director Sushil Suri confirmed the development. He, however, refused to divulge details saying, “We cannot disclose the name of the investor.” Sources close to the deal also said Avenue has the option to subscribe 5% more of the equity by way of warrants in the future. For this, they will have to make a down payment of 10% of the agreed price upfront, while the remaining will be paid up in 18-months. This will trigger off the mandatory requirement of an open offer.   more »