Hedge funds are a recent addition to the Indian alternative investment landscape, when the SEBI Alternative Investment Fund (AIF) Regulations were notified in 2012. Prior to 2012, alternative investment strategies that involved public equities were limited to long-only portfolios or one-off offerings from brokerage houses. However, the meteoric growth of Category-III AIFs has demonstrated that there is tremendous investor demand for these funds.
In the past 5 years, Category-III AIFs have garnered Rs.8,483 crore of AUM and the category has grown at a 134% CAGR over the past 3 years – the fastest in the Indian asset management industry. In this piece we will shed light on key trends in the Indian hedge fund industry as well as cover client suitability, strategy evaluation, manager selection and risk management.
Indian equity markets have three distinguishing characteristics that make them ideally suited for hedge funds. First, the long term returns from equities are attractive – over the past 15 years, the NIFTY has delivered a compounded return of 15.40% and the CNX Midcap index has done even better at 20.68%.
Second, this long term compounding has been punctuated by bouts of high volatility that investors have struggled to handle – the NIFTY was down -51.79% in 2008 and has fallen more than 20% from its peak on 62 separate occasions in the past 24 years or five times on average in a two year span.
And third, there is a high degree of dispersion in the performance of individual stocks – both in terms of their fundamentals and their returns – the average spread between the top half and the bottom half of the BSE 200 is 21.35% per year.
These three together make our market ideally suited for a more risk-adjusted approach to investing in equities and for active management over passive management.
We will discuss how hedge fund managers generate alpha in the next article.
Past performance is not an indication of future performance. Investments in the securities market are subject to market risk. Please read the Private Placement Memorandum carefully before investing.
Nalin Moniz is the Chief Investment Officer – Alternative Equity Edelweiss Global Asset Management.