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 »