Hedge Fund Entry Stalled in India
"For a man to achieve all that is demanded of him he must regard himself as greater than he is."
Johann Wolfgang von Goethe
Sporting an estimated 50-75 single manager hedge funds trading long/short markets in India one might be a little surprised why the authorities at SENSEX recently made changes to put the proverbial brakes on hedge fund activity.
In reality, excessive trading activity has come not from a number of smaller players but from so-called global managers often following long/short equity, market neutral, multi-strategy and global macro strategies. This is where the real weight of assets has been impacting the market capitalization of India's stock exchange. If the experience of Japan in the early 2000s is a useful benchmark then there, these global funds effectively accounted for 50%-66% of all hedge fund assets trawling the equity markets. The same is probably true in India.
Indian stocks have been on fire; doubling to over 20,000 in 20 months! And on a year-to-date basis the Sensex was up 37% ion local currency terms and 65% in U.S. dollar terms.
The irony is that there is a misconception that hedge funds are "traders" of stock while mutual funds are "owners" of stock. Recent data from GS related to turnover in the U.S. markets disputes this naive view. Sensex authorities should take note!
The "door" that was closed was the use of P-notes or participatory notes. These instruments are effectively derivatives that are used to buy Indian shares, futures or options. The SEBI has since stated that after an 18-month window the P-notes will be banned.
This will not prevent the activities of hedge funds getting access through ADRs, Indian-listed shares in the U.S. or the U.K.
Finally, India's financial authorities whould understand that liquidity enhancement with new instruments and derivatives should be viewed as a positive aspect of market maturity that can effectively help Indian firms capital requirements as they take on their overseas counterparts in the years ahead. Mahalo!
"For a man to achieve all that is demanded of him he must regard himself as greater than he is."
Johann Wolfgang von Goethe
Sporting an estimated 50-75 single manager hedge funds trading long/short markets in India one might be a little surprised why the authorities at SENSEX recently made changes to put the proverbial brakes on hedge fund activity.
In reality, excessive trading activity has come not from a number of smaller players but from so-called global managers often following long/short equity, market neutral, multi-strategy and global macro strategies. This is where the real weight of assets has been impacting the market capitalization of India's stock exchange. If the experience of Japan in the early 2000s is a useful benchmark then there, these global funds effectively accounted for 50%-66% of all hedge fund assets trawling the equity markets. The same is probably true in India.
Indian stocks have been on fire; doubling to over 20,000 in 20 months! And on a year-to-date basis the Sensex was up 37% ion local currency terms and 65% in U.S. dollar terms.
The irony is that there is a misconception that hedge funds are "traders" of stock while mutual funds are "owners" of stock. Recent data from GS related to turnover in the U.S. markets disputes this naive view. Sensex authorities should take note!
The "door" that was closed was the use of P-notes or participatory notes. These instruments are effectively derivatives that are used to buy Indian shares, futures or options. The SEBI has since stated that after an 18-month window the P-notes will be banned.
This will not prevent the activities of hedge funds getting access through ADRs, Indian-listed shares in the U.S. or the U.K.
Finally, India's financial authorities whould understand that liquidity enhancement with new instruments and derivatives should be viewed as a positive aspect of market maturity that can effectively help Indian firms capital requirements as they take on their overseas counterparts in the years ahead. Mahalo!
posted by Franklin Scruggins | 7:46 AM
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