How is the appetite for hedge funds among Indian HNIs?
Hedge funds are a preferred choice as an investment vehicle globally for offering risk-adjusted returns and we are gaining broader acceptance in India among HNIs. Risk-averse investors, especially those who wish to ride on the upside of the market and at the same time wish to limit downside are keen to invest in hedge funds, known as Category III Alternate Investment Funds (AIFs).
How do you go about constructing your portfolio? How do you protect the downside?
We adopt a combination of top-down and bottom-up approach. We closely track global markets and economies to determine the relative strength and positioning of India as an investment destination. We then assess the growth of our economy and determine the sectors and the stocks to invest in. Additionally, we have sectoral and stock specific caps which reduces the concentration risk. To generate returns, we have a minimum hedge in the portfolio for downside protection and reducing the volatility.
Give us an overview of how big is the hedge fund market globally.
Hedge fund industry forms a majority of the total allocation to alternates. In our estimate, alternates command an allocation close to 12% of total financial assets. We believe that the total size of hedge funds is close to about USD 3 trillion globally.
What are the regulatory hurdles which are posing a problem for the Category III AIFs?
The biggest problem emanates from the complex taxation for Category III AIFs. AIFs are taxed as a representative assessee instead of being taxed at the investor level, which makes it very cumbersome and complex. If it is taxed at the source, we can withhold tax and offer post-tax returns to investors, whereby investors can show the income in their books as an assessee by showing the tax deducted at source certificate. If the taxation was simple and clear, the progress on these funds and Category III AIFs as an industry would have been multifold. It would also have helped in achieving the objective of the Government of developing the onshore fund industry for foreign capital.
Also, the Category I & II have received pass through status from the government and we wish that the same is extended to Category III AIFs.
What is the size of Indian hedge fund market currently and how big it is estimated to grow in future?
The Indian hedge fund industry started in late 2012. The Category III has a total AUM of about 3,700 crore. We have barely scratched the surface in terms of overall portfolio allocation and there is long way to go. It gives a great opportunity to investors who are looking for risk-adjusted returns and diversification of investments. At the same time, it is useful from the markets perspective as these funds increase the liquidity in the market. Thus, these funds can transform India from a developing market to a developed market.
The local hedge fund market can also accept subscriptions from foreign investors. However, due to the complexity of taxation it isn’t a viable route for foreign investors, as they can come from favorable tax jurisdictions. If taxation is sorted, sky is the limit for this industry. It will also help the regulators to monitor investments which are coming from vehicles which are well regulated like category III AIFs.
What is required to make Category III AIFs more popular in India?
In my view it needs a two-pronged approach, which we, as an industry leader are actively pursuing. Firstly, constant dialogue with the regulatory authorities to refine the ecosystem, in terms of taxation and guidelines for operating the funds is needed.
Secondly, constant education to distributors as well as investors will help investors understand the merit of investing in these funds.
What are the challenges in generating absolute returns?
Indian market is termed as a volatile market. And given the experience investors have had in the past, we strongly believe that while we offer the merits of investing in equities, it would be equally important to address the behavioral aspect of investing in equities. Thus, the objective of absolute returns with reduced volatility gains tremendous importance. To manage both these aspects of providing consistent returns while decreasing the volatility, a well experienced team with a long track record is essential. We have been managing this strategy for more than 10 years with great success across market cycles.
Do you disclose the portfolio to investors? How often?
We declare the full portfolio to investors on a quarterly basis. However, as a best practice, we communicate with our investors on our outlook on markets and our fund positioning and strategy on a monthly basis.
What is the expense ratio charged to investors by your fund? How do you make sure that your fund returns make up for expenses?
We have two types of fee structures – 1) 1% AMC fee and 10 % performance fee 2) 0% AMC fee and 15% performance fee. The hurdle rate is 10% p.a.
The fund aims to deliver an absolute return irrespective of the market condition. High consistency of returns while keeping low volatility makes a great case for investors to invest in our fund. Since the launch of our fund in 2013, we have achieved our objectives consistently, thus making up for the expenses.
What is the size of your Ambit Alpha Fund? Does it have a lock-in period?
We are one of the biggest funds in the Category III AIF. Category III AIFs manage about Rs. 3,700 crore in which we have more than 25% (over Rs. 1,000 crore) market share.
Any investor can enter and exit the fund at the end of the month. We believe investors should have all the flexibility to enter and exit at will and thus we haven’t kept any lock in, barring the monthly window for administrative purpose.
Are you planning to launch any new AIFs?
Yes, we are planning to launch another Category III AIF which will offer relative returns as against our existing fund which aims to offer absolute returns.
