RPT-Indian hedge funds dare where foreign investors fear to tread

Sun Apr 28, 2013 11:13pm EDT

Related Topics

* Absence of rupee risk, local market knowledge to help
domestic funds
    * High fees, distribution costs to be a challenge for
domestic funds
    * Ten local hedge funds operating under new structure set up
by regulator

    By Subhadip Sircar and Rafael Nam
    MUMBAI, April 29 (Reuters) - Indian hedge fund manager
Kalpesh Kinariwala is so sure of his equity strategies in a
country that has stumped foreign rivals that he sends a daily
e-mail tracker of his performance - including to competitors.
    Kinariwala's Capveda Capital (India) Advisory fund, which he
runs from a modest office in a decrepit industrial estate in
Mumbai, has returned 11.86 percent so far this year,
outperforming average negative returns of 2 percent from
India-focused foreign hedge funds.
    Local hedge funds are eager to show off double-digit returns
in the hopes of drawing wealthy Indians and succeeding where
overseas players including HSBC Holdings PLC have
failed. Local market knowledge and the lack of foreign currency
exposure will favour domestic funds, but it remains to be seen
whether Indians would embrace new investment styles in a country
that traditionally prefers buying and holding stocks.   
    "It will be very difficult," said Samir Arora, founder of
Singapore-based Helios Capital, which manages hedge funds
focused on India.
    "India is a small market, and hedge funds will have to show
experience shorting, and they will have to appeal to a high net
worth crowd, requiring (costly) distributors," said Arora, who
shut one of his India-focused funds called "Jai Ho," named after
the Oscar-winning theme song from Slumdog Millionaire in 2011.  
 
    Investing approaches such as an equity long-short strategy
are still a novelty in India, making it harder for hedge fund
managers to attract local wealthy individuals. 
    To raise the bar even more, domestic investors are not used
to the high fees commanded in the hedge fund industry. 
    Funds also face a high success threshold in a country where
plain vanilla bank deposits offer nearly double-digit returns,
with consumer price inflation of around 10 percent.
    Costs are another challenge. 
    To reach wealthy investors, funds are relying on
distributors with deep rolodexes who don't come cheap, charging
commissions of 25-30 percent of gross earnings in the first few
years.
    In light of the challenges - on top of an unruly rupee -
overseas hedge funds have retreated from India over the last few
years.
    Assets under management for overseas hedge funds focused on
India have shrunk by 68 percent from 2007 to $2.1 billion in
March, according to data from Eurekahedge.
    The data also shows India-focused foreign funds returned
12.3 percent last year - a period when the rupee was
whipsawed by economic worries - well under the 25.7 percent gain
in the broader BSE share index.
    HSBC was among the casualties, shutting its India-focused
fund run by high-profile manager Singapore-based Sanjiv Duggal
earlier this year after cash withdrawals from investors.
     
     
 

    START SMALL
    India's regulators have formally approved 10 domestic hedge
funds since last year under new rules aimed at organising the
industry. Overseas funds are not regulated.
    Local funds are planning to start small. 
    The average size of funds is expected to be around 1-2
billion rupees ($18-$36 million), according to industry players.
    They are targeting wealthy individuals and corporations, who
must be convinced to pay the industry standard fees of 1.5-2
percent for management and 15-20 percent of profits, high by
Indian standards. 
    "We will be very selective, probably reject nine out of 10
strategies," said Himanshu Kohli, co-founder of Client
Associates, which advises individuals and families on wealth
management.
    "Wealth creation is a relatively young process in India. The
biggest concern for investors is to protect their capital," he
said.
    Local hedge fund managers are betting that a vibrant stock
futures market would make it easier to undertake shorting
strategies. 
    Average daily futures and options volumes on the National
Stock Exchange have nearly tripled to 1.32 trillion rupees from
four years ago. However, not all stocks can be traded in the
derivatives segment.
    Perhaps the biggest potential cost headache is taxation,
given the lack of clarity on whether capital gains duties are to
be borne by the fund or by the investor. 
    Kinariwala, who is waiting for formal approval of his fund
under the regulator's reorganisation, is not bothered. 
    He is targeting returns of 18-24 percent, more than double
the 7.8 percent yield offered by the 10-year government bond
, and says his performance will convince
investors of the merits of his trading models that he bases on
monitoring market momentum.     
    "If somebody is demonstrating a good track record, the sky
is the limit," said Vaibhav Sanghavi, who heads a long-short
fund at Mumbai-based financial group Ambit Capital, which
received a hedge fund license this month.
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