Indian markets witnessed a hefty foreign funds inflow of about Rs 19,200 crore in September.
"Some of the money is coming from the hedge funds, but a lot of the inflows in Indian market and into emerging markets are coming from Europe and from the US," Farhan A Mumtaz, hedge fund analyst at Eurekahedge explained in an interview to CNBC-TV18.
According to him, many fund managers have taken aggressive long portfolio positions for India. This long-only money is flowing into India because of attractive P/E valuations in Indian and emerging market companies, he added.
The Indian markets will see more fund inflow over the next few months. With the risk on environment created by injection of liquidity by the US Federal Reserve and European Central Bank (ECB), Mumtaz sees emerging market funds and Indian hedge funds pulling some more money in the next two months.
Below is the edited transcript of Mumtaz's interview with CNBC-TV18.
Q: Give us your views on what you have made of this huge rally that the Indian markets have seen the outperformance vis-à-vis global markets and where the money has come in from this time around?
A: Let us just start off by exploring the hedge funds. The Asian hedge funds and ADR-focused hedge funds, they have not captured that much of the money, but they are focused on emerging markets and they are aggressively positioning their portfolios.
A number of managers have indicated that they are taking long positions in the market. So, some of the money is coming from the hedge funds, but a lot of the inflows in Indian market and into emerging markets is coming from Europe and from the US in the risk-on mode.
Q: What would be the colour would it be long only kind of money that is coming, if you say hedge funds are forming a small part of this gain?
A: Absolutely, a number of managers have indicated that they are taking aggressive long portfolio positions for India especially. So it is mostly long only money. It is coming from the western capitals where they are finding increasingly attractive P/E valuations in Indian companies and in emerging market companies.
Q: What about the rupee especially in the past week, it was a sudden incline that we saw or a steep decline in the dollar, clear outperformer the rupee compared to other Asians and emerging market currencies, have the hedge funds started dipping their toes there?
A: Absolutely, the rupee has been so volatile over the past twelve months; it had been expected to increase in value, but not as suddenly. A number of managers had indicated that they expect it to improve versus the dollar and versus other currencies.
Now, India especially like managers and other investors are looking for companies which offer high dividend yield and also high growth potential, so that they can get a diversified returns profile. We expect this inflow to continue over the next couple of months.
Q: In your conversation with clients –what are you hearing about India dedicated funds and what kind of incremental flows or new inflows one can possibly see going ahead?
A: For the moment especially in 2012 year-to-date (YTD) Indians hedge funds have not attracted money. They have lost a little bit of money, but with the risk-on environment with Fed action and ECB, investors are increasingly looking to allocate their money. We expect emerging market funds and Indian hedge funds amongst them to attract some capital atleast in next two months.
Q: Sectorally what is the trend that you are witnessing right now in terms of which sectors are getting more participation versus the others?
A: It is a long-only funds which position themselves in the longish fashion. They are the ones which have become more attractive over the last month or two months. But before that we had seen market neutral funds and funds that diversified portfolios which were more attractive especially in the volatile environment.
So, amongst the global hedge funds, global macro funds which invest broadly in the bond markets geographically and in terms of strategies attracted nearly USD 20 billion in the year. Market mutual funds such as relative value and arbitrage strategies have also attracted significant assets from investors.
Q: Would hedge funds take an interest in any Indian debt product at all?
A: Most of the hedge funds focused on India are equity based. There are a couple of funds which indicate that they take positions in debt, but so far we haven’t seen any substantial number of launches or funds or managers indicating that they are going to take aggressive positions in the debt. Most of them are long biased, equity based funds.
Q: In terms of money allocation, what is the data showing in terms of P-notes and how much of the money has come in from the P-note side of the business because there is some analysis that showcased that the big amount of FII driver has come in from the p-note side?
A: It is because of the Fed action and in the risk-on environment, a number of managers had expected that once the Fed action comes into effect and if the Europeans sort of get their act together then emerging markets will expect future inflows and that is what has happened. We expect this to continue.
Q: Typically, when hedge funds start taking an interest you see a sudden gush, is that round the corner at all with respect to Indian equities?
A: A number of managers who invest globally, they have indicated that their interest is now more going towards emerging markets. A number of managers are travelling through the region as well picking up companies, meeting with company’s management and trying to see which are the best ones to allocate their capital. We expect flows to continue from hedge fund side as well.
Q: What are hedge funds doing or what is they thinking with respect to commodities especially crude, is it that they have legged it out of crude or will leg out of crude?
A: In the commodity funds, which are mostly commodities trading advisors (CTA) trading managers they have not performed so well. It was short-term managers who took positions, short-term volatility which had delivered some returns, but at the moment some managers which were trading on commodities fundamentally, provided some gains over the last two-three months. But at the moment CTA managed future funds are not performing that well. They have lost money from the investors over this year too.