High Life. One for the bravehearts

Fed up with the same old investment options — mutual funds, stocks, real estate and fixed deposits — thrust at you ad nauseam ? Well, if you have the stomach for taking risk and deep pockets to match, you can spice up your portfolio with hedge funds.

Hedge funds are pooled investments managed by a fund manager, similar to mutual funds. But the similarity ends there. The minimum investment is ₹1 crore in Indian hedge funds and at least $500,000 in offshore hedge funds. While the word hedge fund may have sinister connotations for most of us (see box), their unique peddling point is that they offer absolute returns — those that are not dependent on the movement of any market or benchmarked to any index. “Hedge funds can produce a positive risk-adjusted return even in a volatile market,” says Andrew Holland, CEO Ambit Investment Advisor. “Irrespective of whether the market goes down or sideways, we make positive absolute returns each month. Traditionally wealth managers say that at least 10 per cent of your assets should be in an alternative investment, which can be a combination of different alternatives.”

Domestic hedge funds The option of investing in hedge funds was previously closed to Indians as there weren’t any hedge funds based in India. Offshore hedge funds were also out of reach of most Indians since they could remit only $200,000 every year.

But that is all in the past. A host of Indian companies, including Motilal Oswal, Karvy Capital, Edelweiss and IIFL, have launched hedge funds for Indians that invest in Indian stocks, commodities and so on. But the Indian stock market regulator, Securities and Exchange Board of India, categorises hedge funds as alternative investment vehicles pegging the minimum investment at ₹1 crore.

The rationale behind this high investment limit is the relatively limited regulation that these funds are subject to, which makes them risky for small investors.

According to Swapnil Pawar, Business Head and Director, Karvy Capital, “Hedge funds form the middle-ground between equity and debt. Equity investment is volatile, highly risky and yields return between 20 and 30 per cent."

"Debt is safe and less volatile, but the return is less than 10 per cent. With hedge funds, there is little risk and you can make returns between 13 and 15 per cent. The downside is limited to 5 per cent and it is not linked to the direction of the markets.”

It is the Indian businessmen who have made the initial foray into hedge fund investments in India. Some family offices and highly paid executives are the others who have bought these funds. “The net worth of most of our investors is more than ₹20 crore,” says Swapnil Pawar.

“Last year when we launched the fund, there was the currency crisis and people were losing money in the bond market. Now optimism is back, people want to put money into equities. But they should be setting aside a portion of that exposure in alternatives because there is no guarantee that there will be no volatility going forward,” adds Andrew Holland.

Most funds communicate returns to clients on a monthly basis. SEBI has laid out explicit norms regarding the contents and frequency of the reporting. The pay-out to clients could either be at the end of the maturity period or in the interim.

Which strategy? Hedge funds are typically identified by the strategy that they employ. For instance, event-driven hedge funds take positions prior to an event to profit from the outcome. It is these kinds of hedge funds that would have made a beeline to India before the election and raked in moolah in the rally that followed.

Chennai-based Unifi Capital uses event-driven strategies in its hedge fund. It invests based on opportunities arising from corporate events such as mergers, acquisitions and buyback of shares.

Most hedge funds in India appear to use market-neutral strategies. Karvy Capital, for instance, has a Systematic Hedge Fund that invests in futures and options of equity stocks and indices — taking both long and short exposure, thus reducing dependence on the overall market direction.

Some global hedge funds invest based on their expectations of macro numbers of various countries. These are the kind of hedge funds that bet on currency or interest rate movements; the ones who would have hammered the rupee in 2013.

Selecting a fund Raghu Kumar, Co-founder, RKSV, says there are many benefits to running a hedge fund. Hedge fund managers charge a 2 per cent management fee, have 20 per cent share in the profit and no share in the loss. Plus, regulatory scrutiny is limited. He should know, since he tried floating a hedge fund in New York in 2008. “Investors wanting to invest in a hedge fund need to look at the fund manager’s track record,” says Raghu Kumar. “This is possible even if the fund does not have adequate history. It would be good to choose a fund backed by a known name such as Ambit or Motilal Oswal... Having invested in a hedge fund, there are many metrics that an investor needs to keep track of, such as the fund’s Sharpe ratio and fund’s drawdown, besides the returns generated.”

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