parul kumar hedge funds ppt
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An Empirical Study of Hedge Funds in India
and its Strategies
Ms. Parul KumarJIMS, Rohini,
New Delhi
Hedge Funds
“To hedge one’s bets” i.e. betting on other side to limit the possibility of loss on a speculation.
Hedge funds◦ pool of funds of the highly influential
investors,◦opened to limited number of investors◦require high investment ◦include large number of expertise based
investment strategies ◦broad range objectives of risk and return.
Hedge Funds Contd.They can invest in any type of opportunity luring in the any market,
be it options, derivatives, equities, bonds, undervalue securities, currencies, situations such as mergers or bankruptcies, domestic as well as international markets etc,
where they can expect to receive attractive returns in all kind of risky situations.
Main motive of Hedge Funds
Protecting capital (i.e. the private pool of funds)
Generating superior returns in all kinds of markets (i.e. even they promise takings in bearish markets)
While attempting to minimize the risk i.e. to hedge.
2000 2001 2002 2003 2004 2005 2006 2007 2008-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
MSCI All- Country World IndexHedge Fund Research Index Fund Weighted Composite Index
Bear Market Achievers Riding Asset Growth Crisis
Annualized Hedge Funds Return (2000 – 2009)
Objective
First Objective
•How hedge funds have set their mark in India•Lucrative opportunities in India
Second Objective
•Which hedge fund strategy has proved to be best globally in the last 5 years i.e. from year 2006-2010.
Hedge Funds in IndiaAsian countries are offering many
opportunitiesMarket in UK and US are facing
◦huge meltdowns◦ investors are finding hard to sustain there◦money making options are drying
India is offering various necessary conditions for hedge funds to explore with its◦secondary market liquidity◦Futures◦options, etc.
Hedge Funds in India (Contd.)
Investment can be made through FII (Foreign Institutional Investors) route.
1% management fees of the investment amount
doesn’t charge anything on performance or profit of the fund
Thus giving India a plus point from others
Thus attracting more HNIs to enter India through these.
Incremental Nominal GDP in billion US $
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2035-2050
2020-2035
2006-2020
Source: Goldman Sachs Report
Working Age Population Growth Rates (% p.a.)
India
Turk
ey
Braz
il US
Indo
nesia
Austra
lia
Mex
ico
Canad
a UK
Fran
ce
China
Spain
Italy
Germ
any
Kore
a
Japa
n
Russia
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%% p.a.
Source: PwC Report
Hedge Funds in India
Cater to Individual Investors
First Implicati
onUncorrelated returns
Surge in
earnings
Loose charm
for other investm
ent avenues
Second Implicati
onIncrease in
demand
Increase
competition
Reducing
investment fees
Also has cost to it
Registration
Independent audit
Transparency
Proper disclosure
Performance of Indian Hedge Funds• $44,000 million AUM (assets under
management) of all Indian hedge funds
• India’s high beta market generate effective returns.
2006• Bull Run• Q-India, Halbis, Baer Capital,
Insynergy & FMG outperformed major hedge fund indices.
2007• Experiment with complex strategies,
resulted hard on the returns.• India index was the worst performing
index with loss of around 50%.2008
• More cautious in year 2009 and 2010• Taking some worthwhile sectoral and
stock calls2009
• Gloomy picture of hedge fund success• First 7 months having almost deep
losses and very bleak returns• Funds which focused on inflation
sensitive India gained around 15.48% according to HFRX India index
2010
Hedge Fund Strategies Emerging Markets
◦ Invest in emerging markets ◦ Emerging markets offer less options for short selling, so these are
mostly long biased and employ growth or value approach to investing in equities.
Convertible Arbitrage◦ Make profit from arbitrage of convertible securities ◦ Make money from mispricing & volatility ◦ Usually buy a convertible bond, and take a short position in underlying
equity. Long- Short Equity
◦ Base strategy of the initial hedge fund formations by Jones. ◦ Hedging portfolio of longs by portfolio of shorts. ◦ Main focus on the stock picking opportunities.
Global macro◦ Invest in developed as well as developing countries.◦ Enough flexibility can invest in any security in any market where there
is an opportunity. ◦ These can be illiquid & carry a high risk due to correlation of emerging
economies.
Hedge Fund Strategies (Contd.)
Event Driven◦ Focus on events of corporate life cycle like merger and
acquisitions, buybacks, demerger, spin-offs etc,. Merger/Risk Arbitrage
◦ Focus on the companies which are going through any merger or takeover
◦ Both the acquiring company and the target. ◦ The risk is deal risk rather than a market risk.
Distressed Securities◦ Buying the bonds or securities of companies facing or
approaching bankruptcy or restructuring ◦ Tries to benefit from the price movement of these securities.
Equity Market Neutral◦ Market timing rather than stock picking. ◦ Taking long and short position in the undervalued and
overvalued securities ◦ Has low volatility.
Methodology
Use of secondary data ◦ Related to the returns (ROR) ◦ Various hedge fund strategies
Average of returns from year 2006-2010 are taken into consideration ◦ conclude the ranking of each strategy ◦ comparison from the data extracted from Hedge
funds research and Dow Jones Credit Suisse indices.12 strategies from Hedge fund research indices 7 strategies from Dow Jones Credit Suisse
indices Risk levels are measured through standard
deviation between last 5 years.
HFRX Returns 10 09 08 07 06 Avg Stdev Min Max Rank
Global Hedge Fund 5.19 13.4 (23.25) 9.26 2.72 1.46 14.40 (23.25) 13.4 7
Equal Weighted Strategies
5.29 11.44 (21.9) 8.83 1.28 0.99 13.35 (21.9) 11.44 8
Absolute Return (0.12) (3.58) (13.09) 7.43 (0.03) (1.88) 7.45 (13.09) 7.43 11
Market Directional 9.32 29.34 (29.7) 10.45 4.2 4.72 21.48 (29.7) 29.34 2
Convertible Arbitrage 8.76 42.46 (58.37) 9.57 (5.69) (0.65) 36.77 (58.37) 42.46 10
Distressed Securities 8.34 (5.6) (30.69) 9.56 1.21 (3.44) 16.41 (30.69) 9.56 12
Equity Hedge 8.92 13.14 (25.45) 9.23 4.19 2.01 15.67 (25.45) 13.14 4
Equity Market Neutral 2.64 (5.56) (1.16) 4.76 0.21 0.18 3.93 (5.56) 4.76 9
Event Driven 1.98 16.59 (22.11) 10.32 2.81 1.92 14.70 (22.11) 16.59 5
Macro (1.73) (8.78) 5.61 5.61 6.67 1.48 6.64 (8.78) 6.67 6
Merger Arbitrage 5.69 8.14 3.69 10.73 3.72 6.39 3.03 3.69 10.73 1
Relative Value Arbitrage
7.65 38.47 (37.6) 10.65 (0.97) 3.64 27.39 (37.6) 38.47 3
Table I: Hedge Fund Research Index (HFRX) Returns, 2006-2010
Dow Jones Credit Suisse indices
10 9 8 7 6 Avg Stdev Min Max Rank
Convertible Arbitrage 0.9 3.24 -2.79 0.11 1.04 0.50 2.18 -2.79 3.24 7
Emerging Markets 0.81 2.04 -2.19 2.51 1.8 0.99 1.89 -2.19 2.51 1
Event Driven s 0.6 1.6 -1.46 1.64 1.03 0.68 1.27 -1.46 1.64 6
Fixed Income Arbitrage 0.38 0.3 1.01 1.29 0.86 0.77 0.42 0.3 1.29 3
Global Macro 0.69 0.48 0.98 1.21 0.39 0.75 0.34 0.39 1.21 4
Long/Short Equity 0.58 1.47 -0.85 1.5 1.02 0.74 0.97 -0.85 1.5 5
Managed Futures 1.14 -1.08 2.29 1.39 0.99 0.95 1.24 -1.08 2.29 2
Table II: Dow Jones Credit Suisse Hedge Fund Indices Returns, 2006-2010
FindingsHedge Fund Research
Index Dow Jones Credit Suisse
index
1. Merger Arbitrage with return of 6.39%
1. Emerging Markets (return +0.99%)
2. Market directional with return of 4.72%
2. Managed futures (return 0.95%)
3. HFRX index returns for emerging markets is 17.12 % for 2010
4. HFRX India Index returns is 15.47% for 2010
• Convertible Equity Arbitrage ranked last on the basis of return in both the indices strategy need to be evaluated further
limited options available for convertible securities