Hedge funds focused on India are failing to live up to expectations.
Hedge funds focused on India are failing to live up to expectations. Amid volatile stock market conditions – the SENSEX fell some 60 per cent between ’08 and ’09 and was down 15 per cent earlier this month – India is proving to be the hardest of the BRIC nations to crack, reported Reuters this week. The problem centres on falling stock market conditions and just how sophisticated Indian hedge funds are at profiting from the application of short selling. According to a report by HedgeFundNet, India-focused hedgies fell below the SENSEX in nearly one third of the index’s 40 negative months since 2002. If Indian fund managers aren’t generating alpha, the question over charging performance fees becomes debatable. Part of the issue is that India, like China, is still developing its capital market. Being able to short stocks is not that easy. Vijay Krishna-Kumar, a Mumbai-based hedge fund adviser, was quoted as saying: “Part of the reason is structural because India does not have dedicated [sic] stock lending mechanism to facilitate shorts.” He said that because most Indian managers come from the mutual fund world, they don’t really understand the short side very well. If they want to grow as credible hedge funds, they might want to start learning. Investing in mid-cap and small-cap volatile stocks to generate out-performance is not a recipe for long-term success. There are currently 220 stock futures in India to hedge against downside risk.