To the brink and back again – the Indian hedge fund story

Reuters | Farhan A. Mumtaz | Fri Jul 9, 2010 | 6:07pm IST

“It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light, it was the season of Darkness; it was the spring of hope, it was the winter of despair; we had everything before us, we had nothing before us; we were all going directly to Heaven, we were all going the other way.” – Charles Dickens

No other hedge fund region in the world has seen such wild swings in fortunes as India over the last five years. At first there was nothing (before 2004 there were a handful of managers investing in India), and then with a big bang, hedgies started their mad rush for Indian gold. Between 2005 and 2007 the industry grew at a break-neck pace, more than 100 percent increase in assets year-on-year. And for the first couple of years it was all good. But then, as the world was rocked by the financial crisis, strong inflows suddenly turned into massive outflows, hefty profits became steep losses and offices began to shut shop all around. In 2008 the assets under management in Indian hedge funds declined by more than 70 percent – with dismal returns of -50 percent.

The naysayers said that it was a case of too much too soon; others questioned the credentials of the managers while everyone looked around for scapegoats. Yet as the storm slowly subsided, Indian hedge funds came through with stronger fundamentals and today they form one of the most promising sectors of the global hedge funds industry. In 2009 India was one of the best performing regions in the hedge fund world, delivering excellent returns of 53.61 percent and in 2010 India continues to be the best region in terms of year-to-date returns. In addition to the gains posted through performance, the sector has also attracted significant capital with total assets under management nearly doubling in the last eighteen months to go reach $5 billion.

The structure of the industry has also changed considerably from the pre-crisis days – there is now greater diversity of strategic mandates, earlier overwhelmingly dominated by equity-based funds. While multi-strategy funds have increased their share from 10 percent to more than 20 percent of the Indian hedge fund industry, other funds employing various arbitrage strategies as well as those playing in the commodities and fixed income sectors have also entered the Indian market. Important changes on the ground, such as the evolution of short-selling laws over the last few years, have also helped to make India an attractive region for hedge funds.

Other trends in the industry include changes in type of money coming in, different backgrounds of managers, instruments traded and fund domiciles to name just a few. While it’s too soon to say whether all these changes are for the better, diversity has historically been a good thing and in the current market environment this brave new Indian hedge fund sector seems destined for greater success. Over the coming weeks, we will explore the different aspects of the Indian hedge funds universe in greater depth. While this industry is still young, it has gone though a baptism of fire and has already set some remarkable trends which promise an interesting perspective, and much more.


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