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FII's instant entry to India currency markets unlikely

It seems, foreign institutional investors’ (FII) have to wait some more time to enter into currency futures markets in India.

The Reserve Bank of India (RBI) is not in favor of foreign institutional investors’ entry into currency derivatives, even as the futures market for currencies and commodities segments continues to grow strongly.

In a joint meeting of regulators comprising RBI officials and the Securities and Exchange Board of India (Sebi) recently, the RBI expressed unwillingness to allow FIIs into currency derivatives and commodities futures where even domestic institutional players are not allowed entry.

Average daily volume of currency derivatives for the current month till last week was Rs 30,190 crore on the MCX Stock Exchange and National Stock Exchange (NSE). In April 2009, it was Rs 4,677 crore.

FIIs are active in the equity derivatives market on NSE and hold one-third of the total gross open interest and 10 per cent share in average daily turnover. Looking at this strength, the RBI has shown the unwillingness.

The central bank has also shown apprehension about allowing delivery-based settlement in currency futures. Currency futures are settled in cash, like equity derivatives.

However, market players hedged on their currency requirement on the exchanges, are required to enter the second deal in cash market at the time of receiving or making an actual delivery of foreign exchange.

To avoid this double effort, proposal was made to the regulator to allow option of delivery-based settlement in currency derivatives.

Proposal was such that on certain days before the settlement, players could disclose to the exchange that they wanted to take or give delivery as the case may be. Once both intentions matched, the recognized banks could ensure the transaction. This practice is prevalent on the commodity exchanges.

But the RBI is understood to have said at the meeting that anything that could affect inflows or outflows of foreign currency from the country should not be considered as of now.

While discussing the currency derivatives issues, the regulators also decided to consider whether options could be permitted in the segment. Sebi is said to have sought views of the stock exchanges in this regard.
Source: Commodity Online

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Hedge funds start year in the red as global markets edge down

Hedge fund strategies ended the first month of the year down 0.94 per cent as stocks pulled back amid fears about the global economy and the fiscal health of some Eurozone countries, according to the Lipper Hedge Fund Composite Index.

Convertible arbitrage (-0.12 per cent) and credit focus (+0.27 per cent) led the performance league table for January.

In contrast, other hedge (-2.67 per cent) and managed futures (-2.79 per cent) were the worst performing strategies.

All equity-related strategies ended in negative territory in line with the global stock markets.

Meanwhile, trend followers also posted losses, hammered by a correction in stocks and commodities.

Global stock markets were down 4.11 per cent for January as measured by the MSCI World TR Index.

All three major US stock indices registered their worst monthly performance since February 2009. The S&P 500 TR, the Nasdaq, and the Dow Jones Industrial Average posted -3.60 per cent, -5.37 per cent and -3.46 per cent for the month respectively.

Developed and emerging markets edged down 4.84 per cent and 5.56 per cent, respectively, month on month.

The developed markets were weighed down by double-digit negative returns for Spain (-11.82 per cent), Greece (-10.42 per cent), and Portugal (-10.23 per cent). There were, though, some bright spots in Denmark (+3.13 per cent) and Finland (+2.27 per cent).

Meanwhile, emerging markets posted losses during the month, with BRIC members posting disappointing returns: Brazil -10.98 per cent, China -8.64 per cent, and India -5.31 per cent. The top gainers on the performance league table were Egypt (+8.96 per cent) and Morocco (+4.30 per cent).

Long-bias (-1.70 per cent) and long/short equity (-1.05 per cent) focusing on US companies delivered negative returns as risk-aversion drivers infected a number of asset classes globally.

Volatility as measured by the CBOE VIX climbed from 21.68 for December to 24.62 for January, up 13.56 per cent.

Nine of the ten sectors included in the S&P 500 Index closed the month in negative territory, led by big drops in telecommunication services (-9.32 per cent), materials (-8.66 per cent), and technology (-8.45 per cent) shares. In contrast, healthcare (+0.42 per cent) was the only sector posting a positive return.

All styles registered negative performance, with large-cap stocks beating mid- and small-cap stocks and value outperforming growth stocks at the end of the month.

Managed futures (-2.79 per cent) experienced another bad month in January on unanticipated trend reversal and non-directional volatility.

Commodity prices posted the biggest monthly drop in 13 months on concerns that demand may slow. The Reuters/Jefferies CRB Index slumped 6.28 per cent month on month, coinciding with stock markets’ losses. All sectors except soft commodities (+3.47 per cent) ended in the red.

Industrial metals (-8.92 per cent) was the worst performing sector, bettered somewhat by energy (-8.63 per cent). Zinc (-17.96 per cent) and lead (-16.99 per cent) were the weakest industrial metal components during the month. Gold tumbled 1.25 per cent, while heating oil dropped 9.95 per cent.

Event-driven also saw losses during the month; the global M&A deal value fell 19 per cent to USD184.5bn for January. Healthcare was the leading sector for deal activity, followed by telecommunication services.

The largest deal of the month was Novartis’ bid to buy out minority shareholders in eye-care firm Alcon, a two-part deal valued at USD28.1bn and USD11.2bn, according to Dealogic.

High yield bond markets had a positive start for 2010 with global high-yield bonds rising 1.40 per cent. Both Europe and US high yield markets as measured by the Merrill Lynch HY TR Index generated positive returns, closing at 3.23 per cent and 1.52 per cent, respectively.

The most speculative CCC-rated tier (+2.40 per cent) once again outpaced the higher-rated BB (+1.35 per cent) and B (+1.13 per cent) sectors.

In the FX market the US dollar advanced against major currencies in January as data showing the US economy grew in fourth quarter 2009 at the fastest pace in more than six years boosted views the US was recovering faster than other developed countries. The US dollar appreciated 3.17 per cent against the euro and 2.89 per cent against the South African rand. It depreciated 2.80 per cent against the yen, 0.94 per cent against the sterling, and 1.42 per cent against the Australian dollar.

Source: Hedge Week

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Orchard Capital targets new $500 mln Asia hedge fund

Hedge fund manager Orchard Capital Partners, which spun-off Stark Investments in 2009, said it has launched a new long/short fund on Thursday which it aims to grow to $500 million in two-three years.

The fund, Orchard Gemini, which began trading in January is expected to open up to outside investors in April 2010.

Orchard was formed in October 2009 after Teall Edds and Stuart Wilson who were running Stark's Asia investments quit the Milwaukee-based hedge fund taking the firm's Hong Kong and Singapore operations with them.

Orchard has around $400 million in assets under management in equities, illiquid credit and multi-strategy funds. The hedge fund manager is also a sub-adviser to some of Stark's investments in Asia.

This new long/short fund will look to invest across the region, most notably in Australia, South Korea, Hong Kong, Singapore, Japan, India, China, Taiwan and Indonesia, said Orchard Capital in a statement.

“When we established Orchard late last year, we did so with the intention that equities would ultimately make up about half of our business,” said Edds, who is a principal at Orchard.

Orchard Capital hired Alex Lin from Credit Suisse as a senior portfolio manager in October and launched an equity fund for an outside investor in November.

Source: Reuters

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Hedge funds to favor BRIC not PIIGS in 2010: Lipper

The fast-growing BRIC group of economies will be back in favor in 2010 among emerging markets-focused hedge fund managers, who may shun European countries slammed by recession, an industry expert said.

While strong growth is expected in Brazil, Russia, India and China, the European Commission expects the fiscal position of so-called PIIGS — Portugal, Ireland, Italy, Greece and Spain — to worsen even further in 2010.

“Concerns about absorption of new government bond issues will affect the intermediate-to-long sector of the yield curve in those countries,” Lipper hedge fund research head Aureliano Gentilini told Reuters on Friday.

“Rating agencies will downgrade further the credit rating of PIIGS countries.”

New Lipper research said India-focused investors will be the cornerstone of net sales in the Asian region in 2010, with hedge funds focused on emerging markets strategies accounting for a large portion of capital inflows.

China and Brazil are also expected to see strong inflows, although these may be less significant in Russia where political and governance issues remain worrying for asset managers.

The research says single manager hedge funds will see about $100 billion in new money in 2010 after two consecutive years of outflows. Average single fund returns of 10 percent will propel assets to $1.86 trillion by the end of the year, Lipper said.

Gentilini said funds of hedge funds will fare less well, with mixed flows over the year.

“There are questions about whether funds of funds are sufficiently diversified. We have already seen a trend of more experienced institutions shifting toward investments in single funds rather than funds of funds,” said Gentilini.

The proportion of total hedge fund assets held by funds of funds will slip to 25 percent at the end of 2010 from 33 percent in 2009, Gentilini said.

In single manager hedge funds, the alpha component, or the ability to choose securities which will outperform the broader market, will be more relevant in 2010 than in 2009, he said.

“Equity market conditions will be choppy, and alpha drivers such as stock picking skills will be more important than beta, or the ability to replicate market trends,” he said.

Source: Reuters

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Speculative Investment in Gold Seen Broadening

A broad spectrum of participants are buying up gold as it sits at record highs, all hoping to add a little glitz to their portfolio.

To be sure, some of the gold demand is from jewelry fabricators or buy-and-hold type investors such as those who purchase small bars and coins. But a large chunk is also coming from those who move in and out of the market more often. The sharp gains in gold — up about 26% on the year — have made it all the more alluring to these speculators who do not need physical metal and are making short-term bets on price direction.

The seemingly constant string of fresh record highs is only encouraging more participation in the market, said Kevin Kerr, editor of Kerr Commodities Watch newsletter.

“[Investment is] much broader than we've ever seen before,” Mr. Kerr said. “People are participating that never have before.”

Individual investors are broadening out from buying just the odd mining share or gold mutual fund and are now buying exchange-traded funds — which can be had like stocks — and futures that are more accessible through new trading platforms.

This type of individual investment is combining with money flows from hedge and index funds as participants look for a U.S. dollar and inflation hedge.

According to Nov. 6 data from the U.S. Commodity Futures Trading Commission, the government oversight agency for the futures industry, speculative managed-money funds now hold more than 23 million ounces in positions indicating they think the metal's price will rise on the Comex division of the New York Mercantile Exchange. That was out of 52.1 million outstanding contract ounces.

Since the beginning of October, holdings in the world's largest physically backed ETF, SPDR Gold Trust, have risen to 35.8 million ounces from 35.2 million ounces.

“All told, investors poured $552 million into gold bullion ETFs in October,” a Morningstarreport said.

As of Nov. 5, holdings in 12 gold ETFs monitored by stood at 56.7 million ounces — worth about $63.3 billion as of Friday's nearby Comex November gold settlement of $1,116.10 an ounce.

Total net assets at the end of October for more traditional precious metals mutual funds stood at $20.3 billion, for about 60 funds, said Harry Milling, precious metals mutual fund analyst with Morningstar. “Flows have been robust as you can imagine,” Mr. Milling said.

Another source of speculative demand comes from more well-funded money management firms, hedge funds and bank proprietary trading desks.

Many of the hedge and index funds rely solely on computer models so they can replicate the movements of the asset class, allowing them to track futures prices similarly to ETFs and mining shares, said Kitco Metals analyst Jon Nadler.

Some hedge fund managers who have been spotlighted for their investment in gold include John Paulson at Paulson & Co. and Greenlight Capital's David Einhorn. Mr. Paulson at one point this year held nearly 9% of the SPDR Gold Trust.

In addition to futures investment or ETF holdings, speculative funds also buy and sell gold in the off-exchange over-the-counter market.

That affects prices on the futures market because these entities often offset their positions on exchanges, said Carlos Sanchez, associate director of research with CPM Group. Conversely, they also offset exchange positions with over-the-counter trades.

Index funds are also a speculative avenue. These funds invest in, for example, a basket of raw materials and allocate a fixed percentage of the money that comes in to specific commodities.

Source: WSJ

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Hedge Funds Struggle

The hedge-fund industry may be on track to deliver its best annual returns in years, but many managers still aren't in a position to collect performance fees.

Most hedge-fund fortunes were earned through the collection of performance fees, typically 20% of any profit. The fee structure gives managers an incentive to outperform and provides some protection for their investors. But in the third quarter, roughly two-thirds of funds globally still hadn't recovered from the steep declines of 2008, estimates Chicago data tracker Hedge Fund Research Inc., or HFR. About a quarter of funds were more than 20% below their previous high point, or high-water mark, and thus couldn't charge performance fees for this year's gains.

Clawing back to the point at which a fund can charge such fees again requires having a percentage increase that is larger than past percentage losses. A client with $1 million at a fund that falls 50% would be left with a balance of $500,000, so the fund would have to rise 100% before the manager could start charging incentive fees again. Hedge funds as a group were up about 17% on average this year through the end of October, following losses of roughly 19%, according to HFR.

The industry “is recovering, but not yet recovered,” said Kenneth Heinz, HFR's president.

London hedge fund GLG PartnersLLP, whose shares are traded in U.S., says its funds posted returns of about 25% on average in the first nine months of this year but about $7.6 billion of assets remain below their high-water marks. That is more than half of the $14.1 billion of assets at the firm that are eligible for performance fees. Of that, about $3.9 billion is more than 30% below. That has helped trigger a 72% drop in performance fees for the three months ended September, to $1.9 million from $6.8 million a year earlier, according to GLG.

Co-Chief Executive Noam Gottesman, on a Nov. 5 call with analysts, said “the outlook for performance fees at GLG has brightened significantly with our strong investment performance over the course of 2009.” In total, GLG manages $21.6 billion of assets, including in mutual funds as well as hedge funds.

Regardless of performance, hedge funds also earn fees based on the amount of money they manage, typically 2% of funds under management. But those fees have been hurt by the marked decline in assets. The industry's assets stand at about $1.5 trillion, down from the peak of more than $1.9 trillion reached in early 2008.

The flagship fund at CQS LLP, another London fund, remains below its high-water mark despite being up about 26% this year through the end of October, according to a person familiar with the returns. The convertible-bond-focused fund posted losses of about 32% last year.

CQS's other funds, which each are up about 20% or more this year, have either regained their high-water marks or were never below, this person said. The best performer, the CQS Directional Opportunities Fund, was up an estimated 48% in the first 10 months of this year. CQS manages about $6.4 billion of assets in total.

For many managers, 2009 will be the second year in a row that they won't be pocketing performance fees. A lack of incentives can cause traders and other staff to jump ship, though there aren't as many places to jump to these days, as few hedge funds or bank proprietary trading desks are hiring. It also can create incentives for managers to shutter their funds and start new ones where they have the opportunity to earn performance fees right away–if they can attract investors.

The Children's Investment Fund Management LLP known as TCI, has had several senior executives leave, including co-founder Patrick Degorce, who departed at the end of last year and is setting up his own fund. The London fund, which ended last year down more than 40% after years of stellar returns, is up slightly this year, according to people familiar with the results. Some people were asked to leave TCI on performance grounds and several new hires have been made, one of these people said.

Source:  WSJ

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Volumes in currency futures up

Trading volumes in the currency futures segment of both the MCX SX and the National Stock Exchange (NSE) have risen by nearly 44 per cent in October so far, compared to last month. The rise, say experts, can be linked to a strengthening rupee, which went up 3 per cent against the greenback during this period.

On NSE, over 1.68 million contracts have been traded in October so far, compared to around 1.17 million contracts in September. On the MCX SX, over 1.72 million contracts have been traded so far this month, compared to a little over 1.19 million contracts in September. The rupee, which has gained over 10 per cent from its March 2009 low of 52.17, was last traded at 46.74 against the dollar.

Although the size of trades has not been quite significant compared to volumes in developed countries, it is mainly punters who have been placing their bets in the segment due to signs of economic recovery.

The rupee has been constantly rising against the dollar since March 2009 on the back of heavy flow of investments into the country. Foreign institutional investors (FIIs) have invested over $15.64 billion in the domestic equity market so far in 2009, beating the inflows of $14.4 billion in stocks registered in 2007.

The domestic currency futures market, however, is still in a nascent stage as it was started only last year. Major trades in the currency futures are done in the unregulated non-deliverable forwards (NDF) market run by a few top banks from Singapore. In India, no foreign fund or institution can take position in the segment.

“The recent rise in trading volumes has been mainly due to high fluctuations in the currency. However, we have conducted over 200 training programmes to educate people about the importance of currency futures, which could be one of the major contributors to the rise in volumes,” said MCX SX Executive Director U Venkatraman.

This vibrant NDF market, which dates back to the 1990s, was a response from foreign banks and brokers to restrictions on onshore currency forward contracts clamped by many governments. Hedge funds contribute to nearly 80 per cent of the volumes in Singapore, the biggest NDF market for trading in currency of all major Asian countries. All the deals here are in dollars and settled in cash by paying the difference between the contracted forward price and the resulting spot price of the rupee on the settlement date. The NDF market serves hedge funds, multinationals taking the participatory note route to buy stocks and entities interested in speculating on India but cannot take rupee exposure legitimately.

In order to hedge their risk when large funds take positions in the Indian stock market, they may go short on the NDF market and buy there when they sell stocks to convert their money to dollars. Thus, no rupee transaction actually takes place, but the instrument serves as a betting device on the value of the rupee. The market has witnessed a huge growth, with the average daily transactions exceeding $700 million in 2007-2008 from about $100 million in 2003-2004.

Of late, some local trade bodies have made representations to the Securities and Exchange Board of India and the Reserve Bank of India to introduce cross-currency futures and other currency pairs such as rupee and yen.

Source: Business Standard

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US hedge fund plans to invest Rs 500 cr in hydropower cos

US hedge fund Wexford Capital LP is looking to buy equity stakes in Indian hydroelectric power generation companies and has chalked out a plan to invest Rs 500 crore in the country. The fund house will make investments through its wholly-owned subsidiary, Indus Renewable Energy India. At present, Indus Renewable Energy does not have any operations or any downstream investment.

A person familiar with Wexford’s expansion plans in India said Indus Renewable Energy has already sought approval from foreign investment promotion board(FIPB) to make investment.

Wexford Capital LP is an investment advisor with over $5 billion of assets under management. The firm, which was formed in 1994, manages a series of hedge funds and private equity funds.

Hydro power accounts for a quarter of India’s total power generation of about 1.5 lakh mw and is yet to be harnessed fully. It is estimated that the country’s hydro power potential is around 1.5 lakh mw, of which 72% still remains to be developed.

Given that over the last few years there has not been much progress in development of hydro power projects, the government had sometime back come up with a fresh policy which provides incentives to initiate development of hydroelectric power and thereby reduce dependence on thermal or coal backed-power projects for the electricity requirements of the country.

National Hydroelectric Power Corporation and private sector infrastructure group Jaiprakash are among large players in hydro power generation in India. Others such as GMR, Lanco and Bhilwara groups are also in the process of building hydro power capacity.

Source: Economic Times

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Tougher hedge fund norms may hit India too

Life could become tougher for hedge funds and private equity firms, with the European Union and US policy makers considering stricter regulations for the trillion dollar industry. The watchdogs are aiming to fill in the gaps in the system and have called for greater transparency in the funds’ investment style, periodic disclosure of portfolio, besides limiting their aggressive leverage.

The proposal, if implemented, could impact India too, say industry observers. This is because most of the funds that invest in India are from these countries. Also, it would limit domestic private equity funds’ ability to raise money from the overseas market as US and European investors are the biggest subscribers, said Vikram Shroff of law firm Nishith Desai Associates.

At a recent private equity seminar organised by the government of Mauritius, Securities and Exchange Board of India’s executive director Usha Narayanan said the market regulator always encouraged registered foreign entities to India. However, she added that the EU proposal may impact funds flowing through tax-efficient jurisdictions as the directive restricts the ability of marketing of Alternative Investment Fund Managers (AIFM) domiciled outside.

Mauritius is the favourite gateway of PE firms to route their investments to India because of attractive tax rules. PE investments in India in 2008 stood at a little over $11 billion.

The proposal has sparked intense debate among fund managers, with some strongly criticising the approach. Speaking at the seminar, Jean-Marc Goy, counsel for international affairs of Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF), said: “While Luxembourg supports the aim of the proposal (European directive on AIFM), we believe that the proposal has to be improved in a number of fields.’’ CSSF supervises Luxembourg’s financial sector. In Luxembourg, the directive would cover 1,811 investment funds, which manage assets worth € 395 billion.

The attempt to regulate AIFM follows their alleged involvement in disharmonising the global financial system. Late last year, Bernard Madoff, through his Ponzi scheme, duped thousands of investors. Recently, Galleon hedge fund founder Raj Rajaratnam was arrested in relation to an insider trading case.

One of the EU rules includes funds adhering to caps on leverage (borrowing capital against their holdings for faster and quicker returns). Narayanan said leveraging is not considered a major issue as foreign funds were not permitted to borrow in India but the regulator is conscious of the impact that sudden withdrawal of leveraged funds can have on the Indian market.

The new EU regulations, according to international media reports, could cost hedge funds and PE firms as much as € 3 billion to adhere to the new standards.

Source: Economic Times

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PMA Capital Launches India-Focused Hedge fund

PMA Capital Management has launched a new India fund, which focuses on alpha generation from long and short positioning in the top 250 Indian companies according to market capitalization.

The new vehicle, the PMA India Fund, utilizes a mix of rigorous qualitative and quantitative processes that combines a top-down discipline with bottom-up analysis.

The PMA India Fund is being managed by Anoop Villait, who heads the PMA India Strategy and has over 15 years of experience in the Indian markets, as well as an extensive contact base with Indian corporates and foreign banks.

Prior to joining PMA, Villait was the lead manager of the Kuvera Fund, an Indian long short equity fund which had peak AUM of approximately US$190 million. From July 2004 to July 2007, Villait achieved a composite performance of 93.16% and an annualized return of 23.8%.

“It is a great time to introduce this fund as the Indian market has inefficiencies that we aim to exploit to deliver absolute returns for our investors,” said Villait. 

Investors can also achieve exposure to the PMA India Fund by investing in the multi-strategy PMA Asian Opportunities Fund, which directly invests into PMA single strategy funds and also incubates new strategies. The Asian Opportunities Fund provides broad Pan-Asian exposure via liquid asset classes including credit, equity long/short, and forex. The portfolio weightings of the Asian Opportunities Fund are dynamically rebalanced as investment opportunities arise.

“The launch of the India Fund is a noteworthy undertaking as it comes at a time when the market environment makes it increasingly difficult to launch new funds,” said PMA’s Chief Operating Officer Kam Bahra. “The market demands of hedge funds more robust infrastructure and higher levels of service, such as heightened transparency and operational controls, which require substantial investment. PMA had the foresight to institutionalize our platform from the very beginning. Our ability to meet these investor requirements and launch the India Fund is the result of a longstanding focus on a best-in-class infrastructure, including diligent daily reporting and an independent risk management function.”

PMA was established in July 2002 and is recognized as one of the leading Asia-based institutional hedge fund platforms with assets under management of $1.7 billion.

Source: Finalternatives

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