A relaxation of regulations by the Securities and Exchange Board of India is spurring an influx of managers in the region. The capital markets regulator, which has been biased against hedge funds for some time, has now changed tack to force hedge funds to register directly as foreign institutional investors (FIIs). Although some press reports claim this will make it more difficult for hedge funds to open for business, managers find the news encouraging.
“Up until very recently, hedge funds were not allowed to be registered in India. They were only able to buy and sell shares by using participatory notes, a derivative instrument traded with large FIIs such as the global investment banks,” says Rob Rahbari, managing director at RAS Capital Management, a fund of funds firm focusing on India.
But concerns about the lack of transparency this was causing, and the inability to know who exactly was influencing the market, forced Sebi to change regulations to make all foreign market participants register as FIIs.
“It is a good long-term development,” says Rahbari. “The money coming into India will be longer-term money and it should make the markets there less volatile.”
Although returns from investing in India’s markets have been very impressive, volatility has been extremely high.
Rahbari says the number of hedge funds in India has grown substantially. RAS manages a fund of India hedge funds. “We track around 120 funds and that is increasing quite quickly. A year and a half ago, that number was more like 70. Furthermore, as the economy grows, that will further encourage the creation of new hedge funds to invest into India.” RAS’s fund, which has been running just over a year, has returned approximately 40% net.
In terms of breadth of strategies, Indian hedge funds are still limited relative to other developed countries but there are good opportunities to be had.
“It’s not the US in terms of breadth and depth but the Indian market is broader than people realize,” says Rahbari. “There are some 8,000 listed stocks on 23 exchanges, and the top 2,000 are reasonably liquid.
“There is a broad range of diversified industries, and on the arbitrage side the futures and options market in India is very well developed. Some of the opportunities have not been arbed away yet as they have been in other countries.”
Underdeveloped credit markets
Pure credit strategies have yet to take hold in India because the credit market there is underdeveloped. “Credit is relatively hard to get in India and we certainly are not seeing single-strategy credit funds yet,” says Rahbari. “The offshore convertible bond market is relatively small at about 250 issuances, totalling around $40 billion, but we are seeing some hedge funds finding opportunities there and it is growing quickly. Credit – both consumer and corporate – will be high areas of growth, so the opportunities will open up.”
Rahbari says that RAS is launching an arbitrage focused fund of funds product on January 1, targeting investors that seek to improve on cash returns while maintaining low volatility and correlation to Indian markets (as well as gaining access to rupee exposure). In addition, he says that RAS intends to launch a fund of funds product next year dedicated to longer-term opportunities in India. The fund will invest in such areas as private equity, venture capital and real estate and will have a longer lock-up.
