SEBI Opens More Gate For Hedge Funds In India

If the new allowance by the SEBI with regards to hedge funds is anything to go by, India may soon witness a case similar to the ongoing one in American-listed nutrition company Herbalife which is facing a hedge fund investor battle in its stock.

SEBI, the regulatory watch dog in the capital markets, recently granted registration to five of the eleven asset managers seeking its approval to come up with hedge funds, a Mint piece stated.

This takes the tally to eight as three firms had already secured permission. Their AUMs could likely be in the range of R3,000-3,500 Cr and if all the funds retain 100% of their corpus in the next one year, the total size could be a minimum $1 Bn.

Indian firms, till now, were not allowed to launch local hedge funds but foreign hedge funds are allowed to invest in the country.

Previously denied, SEBI last summer gave way to regulations for Alternative Investment Funds (AIFs) (hedge funds occupying a large mass of this definite term), making way for local hedge funds and complex products.

The one less than a dozen seeking registration approval as AIFs comprise of:

• Ambit Alpha Fund,
• Avendus India Opportunites Fund III,
• CapVeda Absolute Return Fund,
• Lares Softech Pvt. Ltd.,
• DSP BlackRock Alternative Investment Fund,
• Karvy Capital Alternative Investment Trust,
• Malabar Capital Trust,
• Monsoon Alternative Investment Trust,
• Motilal Oswal Alternative Investment Trust,
• Narnolia Alternative Investment Advisors LLP and
• The Rudrabhishek Infrastructure Trust

Forefront alternative Investment Trust, IIFL Opportunities Fund and Quant First Alternate Investment Trust have already been granted approval.

However, a main point to be focused here would be the real purpose of a hedge fund to be registered. Devoid of any set definition of hedge funds, they are widely described as unregistered private investment partnerships, funds or pools that may invest and trade in many different markets, strategies and instruments (including securities, non-securities and derivatives) and are not subject to the same regulatory requirements as mutual funds.

Ultra-rich, HNIs, sophisticated investors who have the capacity to bear risks and look for high returns are the major contributors to such hedge funds.

Coming under the purview of SEBI regulations (which supposedly has an image of a strict watchdog) would normally defeat the purpose of having no regulatory eyes on itself and so the rushing of these funds to SEBI puts a question to one’s thoughts.

Another lag the hedge funds could face is the use of leverage in their strategies. While hedge funds world over are known combine high returns with high gearing, our regulator here is preparing a proposal that will restrict these funds to one-time leverage as against accepted levels of four to five times in most of the advanced markets.

While the SEBI seems right on its part to go slow on the decision to allow hedge funds citing reasons like high volatility movements in the securities and abrupt strategy adoption, hedge funds have their own benefits which under smarter regulation norms, could give the Indian capital markets a wider base of foreign investors, reduction of overall portfolio risk through an additional asset class, superior risk-adjusted performance among other sophisticated solutions.

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