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Galleon begins to shed India holdings

Galleon, which is winding up after its founder was charged with masterminding the biggest-ever insider-trading scheme involving hedge funds, has sold almost half its stake in one of the three Indian listed firms it directly holds shares, stock exchange data showed.

New York-based Galleon sold 950,000 shares in Indian engineering firm Shriram EPC  at 223 rupees ($4.8) a piece to cut its stake in the firm to about 2.4 percent from 4.6 percent, data from the National Stock Exchange showed.

The move comes after investors asked Galleon, which managed $3.7 billion, to return funds and as the founder Raj Rajaratnam told investors and employees he was winding down the Galleon funds.

Galleon also holds a 7.02 percent stake in Indian financial services firm Edelweiss Capital and a small stake in Pipavav Shipyards Ltd. No sale in these securities by Galleon was reported to the stock exchanges during the week.

Shriram EPC shares, which surged 13.5 percent on Friday, rose nearly a third in the week, while Edelweiss Capital fell 4 percent and Pipavav weakened 3 percent in the week.

Source: Reuters

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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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Hedge Funds Struggle To Keep Pace With Equity Markets

Hedge fund struggled to keep pace with equity markets in September, with the Hennessee Hedge Fund Index gaining 3.18% during the month (20.89% YTD).

At the same time, the S&P 500 increased 3.57% (17.03% YTD), the Dow Jones Industrial Average increased 2.27% (10.66% YTD), the NASDAQ Composite Index advanced 5.64% (34.59% YTD), and the Barclays Aggregate Bond Index advanced 1.05% (5.72% YTD). 

“Hedge fund managers we talk to are concerned that the markets are rallying while the real economy is shrinking,” said Charles Gradante, co-founder of hedge fund advisory the Hennessee Group.  “Liquidity is driving this market, and that is likely to continue with more than $3 trillion on the sidelines.  However, liquidity driven markets eventually dry up.  Hopefully, credit expansion and GDP growth arrive to support the market in 2010.”

“Hedge funds experienced a good month in September, slightly lagging equity markets,” said Lee Hennessee, managing principal of Hennessee Group.  “Managers were able to generate gains without significant market exposure and benefited from good stock selection.  Managers remain cautious as valuations appear high, and prices are being driven by momentum.  Managers have increased gross exposures to normalized levels.”

The Hennessee Long/Short Equity Index gained 3.13% in September (18.75% YTD).

According to Gradante, as the equity markets continue to show strength and momentum, hedge funds have taken on additional directional risk in order to participate in the ongoing equity market rally. That said, they remain cautious and aware the market could turn sharply to the downside given current valuations and the apparent disconnect between technical indicators and fundamentals. 

“Little of the bailout money given to banks seems to have been passed on to businesses or consumers. It must have gone somewhere, and it is possible that is has gone to the proprietary desks of the banks, which are putting it to work in the markets,” said Gradante. “That could lead to a potential problem if the public and institutions do not join the rally, and the banks eventually have to sell equities into a vacuum.”

The Hennessee Arbitrage/Event Driven Index gained 3.04% in September (+23.35% YTD).  Positive contributions came from credit, convertible arbitrage, distressed, merger arbitrage and other strategies. 

The Hennessee Distressed Index advanced 3.92% in September (+28.30% YTD).  Managers benefitted from tightening spreads as well as several event specific catalysts. 

The Hennessee Convertible Arbitrage Index advanced 3.43% (39.29% YTD).  Spreads and secondary market richening were positive contributors to the strategy. 

The Hennessee Merger Arbitrage Index advanced 0.48% in September (6.65% YTD). Mergers and acquisition activity continued with Xerox’s planned purchase of Affiliated Computer Services and Walt Disney’s acquisition of Marvel Entertainment. Managers expect M&A activity to continue, but remain underinvested in merger arbitrage as they feel that there are more attractive opportunity sets currently elsewhere.

The Hennessee Global/Macro Index advanced 3.48% in September (22.05% YTD). Global equities rallied as the MSCI EAFE Index advanced 3.59% (25.49% YTD), with strong performance across most emerging and developed markets, with the exception of Japan.  

The Hennessee International Index increased 3.67% (18.76% YTD).  Emerging markets posted strong performance.  Managers continue to favor the emerging markets as they are likely to post positive GDP growth in 2009 and drive global growth for the next several years.

The Hennessee Macro Index advanced 3.35% in September (12.76% YTD).  Macro managers posted their best month since May as they profited from long positions in precious metals, short the dollar, and long emerging markets. Managers profited long sugar, which is up 80% year to date, as weather conditions in India and South America have diminished supply.

Source: Finalternatives

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Hedge funds turn choosy, cut their India exposure

The quality of overseas money being invested in Indian stocks seems to be getting better. Despite the return of foreign institutional investors (FIIs) to the market chasing a zooming Sensex, the bellwether Indian equity index that has gained 77.53% since January, the exposure of hedge funds to local stocks has dipped significantly.

This could mean that the overseas money currently being invested in Indian stocks is here for the longer term.

According to Singapore-based hedge fund tracker Eurekahedge Pte Ltd, hedge fund assets in India were $6-7 billion (Rs28,740-33,530 crore today) at the end of August, sharply down from $18 billion at the end of December 2007, at the height of the bull run. The Sensex hit its lifetime high of 21,206.77 in January 2008.

Hedge funds, which are designed to generate positive returns regardless of the direction of the market’s movement, typically exist outside the scope of regulatory oversight, nor do they report fund size and returns to outsiders.

These funds attempt to maximize return on investment by taking bets on various kinds of global assets—equities, bonds, commodities and currencies— in complex trading strategies that are often backed by even more complex mathematical models.

Hedge funds typically churn their money quickly, often short selling, or selling assets in anticipation of declining prices only to buy them back later, as opposed to pension funds or insurers who invest for a longer tenure.

The fall in these funds’ India assets comes at a time when the global hedge fund industry is recovering from a financial crisis. In August, these funds saw an increase in assets for the fourth consecutive month. They now manage $1.3 trillion; around 300 new funds were launched this year and the rate of closure of existing funds is also slowing.

“No one expected India and China to fall as much as they did,” said Ankur Samtaney, analyst at Eurekahedge. “That’s why in spite of a decent run (so far this year), allocations have been slow because of the big bad ugly drop last year.” The sharp depreciation of the local currency against the dollar last year also eroded the value of investments.

After the collapse of US investment bank Lehman Brothers Holding Inc., markets across the world went into a tailspin. In India, the Sensex shed 52% in 2008 as foreign investors pulled out $13 billion from Indian stocks to meet redemptions in their home markets.

The fall in the assets of India-focused hedge funds, or those that invest a majority of their corpus in India, is even sharper, according to Eurekahedge data. Assets under management of these funds have fallen from $7.86 billion at the end of December 2007 to around $2.1 billion now.

Since then, however, FIIs have returned to India, pumping some $12 billion into the markets so far this year on hopes of economic growth. Among the 14 or so $1 trillion-plus economies, India is predicted to grow at the second fastest rate. The optimism has boosted the markets, more than doubling their value, with the MSCI India index, a benchmark used by foreign investors, increasing by 113% this year, the fastest among major markets.

But hedge funds do not seem to be buying that story.

“There has been a significant deterioration in the business model,” said the head of a Singapore-based India-focused hedge fund, who didn’t want to be identified. “Investors have got pickier after the Madoff Ponzi scheme. The pool of capital has been reduced because the ability to leverage capital is no longer there.”

In March this year, Bernard Madoff, a former chairman of the Nasdaq stock exchange, pleaded guilty to fabricating gains on assets his firm was managing, leading investors to be wary of hedge funds.

Also, with the credit crunch, banks are no longer ready to lend money to invest in stocks, reducing leverage capabilities.

Indian regulators are likely to view this development with relief, especially after taking steps to stem the flow of so-called “hot money” in late 2007. After the Sensex rose seven-fold between 2003 and 2007, the regulator banned some instruments fearing their disruptive effects on markets.

Typically, hedge funds invest in India using participatory notes (PNs) or derivative instruments. Such notes accounted for a major chunk of the $17 billion that was invested by FIIs in 2007. From accounting for less than 20% of total assets managed by FIIs, PNs rose to around 55% in June 2007, prompting the Securities and Exchange Board of India (Sebi) to ban them in October that year.

Despite Sebi reversing the ban in the wake of the credit crunch, investments through PNs account for some 17% of assets managed by FIIs now, which to many people is a clear indication of the reducing exposure of hedge funds.

At the height of the bull run, Tudor Investment Corp., Lloyd George Management Inc., Farallon Capital Management Llc, Raj Mishra’s Indea Capital Pte Ltd, Tree Line Investment Management Ltd and Arshad Zakaria’s New Vernon Capital Llc were all reckoned to have had India portfolios worth upwards of $1 billion, according to several people familiar with the matter. Mint couldn’t ascertain this independently or reach out to all these funds for confirmation.

“Hedge funds are no longer a force to reckon with,” said Ullal Ravindra Bhat, managing director of Dalton Strategic Partnership Llp, an FII.

Indeed, the single largest category of funds investing in India now is exchange traded funds (ETFs), some people say. According to a 17 August report from investment bank Credit Suisse, at least a quarter of the flows into India since March are from investors in this category.

“ETFs are better” because they take into account a larger picture of the economy and markets, said Bhat. “They will continue to stay invested if the relative attractiveness of India continues.”

Source: Livemint

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Hedge Funds Bet On Sugar

Hedge funds have made a mint this year betting on gold, and they hope their latest big commodity bet is just as sweet.

Hedge funds are investing in raw sugar futures in a big way, Bloomberg News reports, helping to double the price of the white stuff since the spring. Sugar last week traded at a 28-year high.

According to the U.S. Commodity Futures Trading Commission, long bets on sugar are up 77% this year.

The saccharine investment looks like it will continue to pay off. Weather problems in such key sugar-production countries as Brazil and India continue to depress production, while an increasing amount of sugar cane is used in producing ethanol—rather than sugar. The International Sugar Organization is projected a 10.4 million ton sugar deficit this season, a record high.

Source: Finalternatives

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Hedge fund eyes gold at $1,600

The price of gold could rise as high as $1,600 an ounce as investors opt for assets with lasting value rather than volatile currencies, says one hedge fund manager who has increased his exposure to the precious metal.

“All the fundamentals are in place. If it breaks last year's high it can go to $1,200 to $1,400 quite quickly,” Pedro de Noronha, managing partner of Noster Capital told Reuters in an interview on Tuesday.

Spot gold rose through the psychologically significant barrier of $1,000 an ounce this week– its highest since March 2008 when it hit a record $1,030.80.

The precious metal was helped by a weaker dollar and expectations that government measures to revive economic growth will boost demand for basic resources.

“If you adjust the gold price for inflation, to retest the early 80s highs gold would need to be at $1,600. I don't think this figure is inconceivable, especially given the fundamentals that are behind this move in gold,” de Noronha said.

Nearly 50 percent of the $45 million Noster Capital fund is now exposed to gold derivatives after it raised its exposure last week.

Quantitative easing by governments has increased the attraction of gold, de Noronha said, while leading global currencies are under pressure due to high levels of borrowing.

“People say they hate the U.S. dollar, but is the euro or (British) pound any better?” he said.

“Do you want to own the stock certificates of a country burning cash year in, year out, or own something that, no matter what, you can't produce more of?

“I think it's a third-quarter or fourth-quarter story — it's just getting into the time of year when gold performs best. All the stars are aligned for gold to work.”

De Noronha also said he thought the huge rally in equity markets this year could unwind and has a large position in S&P 500 .SPX put options, giving him the right to sell at a certain price.

“The market is pricing in 4 percent GDP growth … and that's not going to happen.”

De Noronha also said he would leave Britain if a 50 percent tax rate for those earning more than 150,000 pounds a year comes into force in April as planned. The move has already been attacked by many in the hedge fund industry.

“If it goes to 50 percent I will leave — for Switzerland, Monaco or Miami.”

Source: IB Times

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Hedge funds seek closure of Venus Remedies

US-based hedge funds DE Shaw and Citadel Investment Group have filed a winding-up petition against Venus Remedies, after the Chandigarh-based company defaulted on a foreign currency convertible bond (FCCB) issue. New York-based DE
Shaw, which has invested in several Indian companies such as DLF Assets, and Chicago-based Citadel Investment subscribed to a $12-million FCCB issue of Venus Remedies in May 2006. The bonds came up for redemption on May 2 this year, but company failed to pay the investors.

This is the first time that an Indian company is slapped with a winding-up petition — a formal request to a court for the compulsory liquidation of a company — by FCCB investors.

“This is a case of wilful default by the company. It has money, but is not willing to pay bondholders. That is why we have filed the winding-up petition,” said an executive with one of the hedge funds.

Since the market price of Venus was much below the conversion price of Rs 437, investors did not want to convert it into shares, said the executive, requesting anonymity. The Bank of New York Mellon, the custodian for the FCCB issue, has filed the case in the Punjab and Haryana High Court in Chandigarh. Investors have also sought the court’s intervention to stop the company from paying dividends. The case will come up for hearing in October.

Venus is a profitable company with revenues of Rs 265 crore and a net profit of Rs 46 crore in 2008-09. The company had declared a 30% dividend on August 21, after it defaulted on the FCCB redemption. When contacted, Pawan Chaudhary, managing director, Venus Remedies, refused to comment.

Crisil had in February 2009 assigned a A- rating to Venus Remedies on its debt facilities, citing comfortable financial risk profile marked by healthy size of net worth and strong debt protection indicators. However, it was downgraded to C in May 2009, after the company failed to honour FCCB investors.

DE Shaw, which manages about $40 billion of assets globally, was the first hedge fund to get regulatory permission to operate as an FII in India, while Citadel Global is a $15-billion fund.

The court decision on Venus Remedies will be important, since FCCBs are unsecured instruments, and it can have a major impact on future FCCBs by Indian companies.Over $10 billion of FCCBs issued by more than 100 Indian companies are outstanding and will come up for redemption every month over the next two years. Many companies, such as Suzlon, have renegotiated the terms with FCCB investors, when they were not in a position to make payments.

Source: Economic Times

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Big European Hedge Fund Sets Up to Invest in India

Europe's largest hedge-fund manager has set up two Mauritius-based vehicles as a way for its flagship global-macro fund to invest in India, underscoring the growing interest in the region.

London-based Brevan Howard Asset Management LLP, which manages $24 billion, said in a stock-exchange filing late last week that it had created two funds in Mauritius to hold Indian investments for its flagship Brevan Howard Master Fund. That $15 billion fund pursues a freewheeling global macro strategy, investing in instruments its managers expect to be influenced by global economic themes. A spokesman said Mauritius funds are a standard way to invest in India for those who want to keep assets offshore.

India, along with China, has been at the heart of one such theme: rapid growth of manufacturing and increasing wealth and consumption by the middle class.

It wasn't clear whether the Master Fund or Brevan Howard's Emerging Market Strategies fund already invests in India. A spokesman declined to comment.

In the filing, the flagship portfolio's directors said they don't expect the Indian investments to be large.

Hedge funds that target Asia excluding Japan rallied 27% in the first seven months of this year, making them the second-best performing subset of emerging-markets funds after Latin America, according to data provider Hedge Fund Research.

Their performance was due in no small part to the 62% surge in the Bombay Stock Exchange's Sensitive Index over the same period, following a 52% plunge last year. Hedge funds on average lost 33% last year.

Bill Maldonado, head of hedge-fund manager Halbis Alternatives, part of HSBC Holdings PLC, said most India-focused hedge funds don't bet on shares falling — a hallmark of hedge funds. Most of the money they borrow on top of what investors provide goes on bets that the market will rise. “Most Indian hedge funds have been leveraged long-only funds,” he said.

Halbis's Indian hedge fund, managed by Sanjiv Duggal since its launch in 2007, made 33.6% in the first seven months of this year, after losing 26% last year.

Charlie Cantlie, director at FMG, which invests in emerging-market hedge funds, said hedge funds focused on India had a disappointing performance last year. “We were very disappointed with the majority of hedge fund managers, who got it wrong last year,” he said.


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Hedge Fund of Funds Continue to Lose Assets

As individual hedge funds recover in the first half of 2009, hedge fund of funds are still suffering heavy redemptions. A recent study of the top 50 hedge funds of funds found all but two funds have not recovered from the drop in assets since September 2008.

Assets in hedge funds of funds fell from a spike of $825 billion to just $530 billion in June. This is a staggering loss for the hedge fund of fund industry which has increased at a rate of more than 20 percent annually from 2000-2008. Investment banks led the collapse with the largest reductions in assets coming from the alternative asset arms of banks like HSBC, Goldman Sachs. But even the specialist managers had huge losses: Permal Asset Management's lost 49% of its assets and Man Investments had a 46% drop from Sept. 2008 to June 2009. The only two hedge fund of funds that saw inflows were Blackstone, which grew its operations 25pc, from $20bn to $25bn, and Grovesnor Capital Management, up 1pc from $20bn to $21bn. The hedge fund sector as a whole suffered last year as a combination of the market turmoil and high levels of gearing resulted in its worst performance for a decade. In addition, a sudden aversion to risk and a need for liquidity led to a scramble by investors to withdraw money, causing some funds to collapse. Hedge fund of funds have been hit twice by redemptions both directly and in the funds they invest in. Chicago-based Hedge Fund Research (HFR) has reported that more than 200 funds of hedge funds liquidated in 2009, nearly twice the number of those that closed in the fourth quarter of 2008. However, in recent months some have reported a steady return of inflows, particularly in funds of funds that have restructured and reduced management fees.

Source: istock analyst

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FIIs’ asset base shrinks 39% in last 18 months

Assets under management of foreign institutional investors (FIIs) slumped 39 per cent in the 18-month period ending June 30, broadly in line with the drop in stock prices from the peak recorded in January 2008.

According to data released by SEBI last week, FIIs’ asset base shrank to Rs 6,29,647 crore towards the end of June from Rs 10,27,141 crore recorded at the end of 2007. The benchmark, BSE Sensex, declined 28 per cent in this period while the broad-based BSE-500 and the BSE Mid-cap indices are down 36 and 48 per cent respectively.

SEBI released this data for the first time on Friday.

According to Mr Gul Teckchandani, an independent strategist, some of the investments FIIs made in mid-cap stocks at the peak are still quoting 50-75 per cent lower from that level. This explains the slightly larger value erosion of FIIs’ asset base.

According to SEBI data, FIIs were still net sellers to the tune of Rs 28,683.6 crore in the 18-month period, despite their buying stocks worth Rs 24,303 crore in 2009 (till June).

In the first half of 2009, overseas investors’ portfolio appreciated by 51 per cent.

At the end of June, their asset base jumped to Rs 6,29,647 crore from December 2007 figure of Rs 4,17,470 crore.

FIIs’ holdings through participatory notes (P-Notes) have also come down sharply in the 18-month period ended June.

As against 37-38 per cent of assets under management in December 2007-January 2008, investments through P-Notes tumbled to 15.5 per cent this year.

P-Notes are instruments used by foreign investors or hedge funds that are not registered with SEBI to invest in Indian securities.

In absolute terms, investments through P-Notes peaked in October 2007 at Rs 4,49,613 crore.

SEBI had then imposed restrictions on the issue of these instruments due to fears of excessive volatility in stock and currency markets due to the deluge of money entering the stock markets through this route.

Though the absolute value of investments through P-Notes is down in 2009, a sharp spike in the number of P-Notes outstanding was noticed towards the end of May, leading to the assumption that part of the post-election surge in equities could be due to short-term capital inflows in the form of P-Notes.

“Going forward, India would continue to see large inflows… and lot of India-focused funds, including hedge funds, would be created,” Mr Teckchandani added. 


Source: Business Line

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