Around 200 hedge funds focused on India: Commerzbank

Excerpts of CNBC-TV18's exclusive interview with Mehraj Mattoo:

Q: What is your sense of how the hedge fund fraternity is feeling about the emerging market space right now and ahead of the Fed meet?

A: The gathering we had over the last two days here in Hong Kong, I think the mood is generally positive. There are clearly apprehensions about how the credit crisis will pan out. But my sense really is that investors in hedge funds will generally feel better than investors who go through traditional asset classes, particularly in credit.

I think despite some of the high profile problems we have had in the subprime area within some of the hedge funds, the industry broadly is positive going forward.

Q: Did you sense any panic at all at the conference, that there could be more redemptions or more panic sales waiting to come as the US problems unfolds or things have settled you thought?

A: I do not think that the industry as a whole will suffer significant redemptions. Of course, there will be some fluctuations, after every crisis there will be some redemptions and we should expect that. But overall, I think the expectations are okay.

But what I do expect will happen really is, there will be some flight to quality in terms of investors moving out of those hedge funds that have not done well through this crisis, to those who come out reasonably well. So there will be some flight to quality almost certainly.

Q: How are hedge funds positioned in Asia right now. From your own experience and what you hear around, are people fairly long on Asian markets after the bounce back from the August lows, or are they cautious and hedged?

A: The hedge fund scene in Asia is slightly different from the global scene. Much of the hedge fund industry in Asia is primarily focused on equity markets. And when you are going through a major bull market, you would expect, hedge funds are no exception, people to generally being long. So because of that, for the first few days of August, we saw significant volatility within the hedge fund sector in Asia.

There were some exceptions; obviously there were some Australia based hedge funds who were caught within the subprime crises. But I believe that's an exception. The hedge funds that are based here, or in Singapore, and also many in Australia, are primarily focused on the region and I think there would not be any significant problems with that sector. Clearly there will obviously be short-term concerns with how the industry in Asia will develop. But long-term, the hedge fund industry is well positioned to benefit from the growth in the region.

We focus primarily on large European institutions; pension funds, insurance companies, they obviously take a slightly longer-term view than the trading community does. For them, gaining exposure to Asia through hedge funds is an attractive proposition versus having to invest in the infrastructure to gain access directly.         

Q: There has been one opinion or one fear may rise that if the Fed comes out with some kind of disappointment, there will be a reversal of flows because there will be more risk aversion towards emerging markets and Asian markets. Is that the sense you get from the hedge fund exposures?

A: That is correct. I think that is likely and particularly the economies that are more vulnerable to short-term outflows, India is very important from that perspective.

China relies less on portfolio investments than India does. In China we have a slightly different problem, obviously there is significant overheating in the domestic economy and the equity markets have obviously grown very significantly during the course of the year. So there is some concern about the Chinese equity markets. But much of it is really driven by domestic players.

India is slightly different. There is a significant impact of foreign portfolio investors into Indian equity market. So if there is greater risk aversion across the board, and that will include hedge funds as well, then India could see some reversals almost certainly.

Q: So what exactly have you seen in India positions up until now. Have people taken some profits off the table?

A: I can only speak about the hedge fund community, the hedge funds that are focused on India. It is a growing community and many of them are based in London and New York, some obviously in India as well as Southeast Asia. But there are about 200 hedge funds now focused on India. I think they are, by and large, the ones I have been in touch with, are reasonably comfortable with their positions in India. But a lot depends on how the risk aversion develops specially following the Fed decision on interest rates.  

Q: What's your own stance on India now. Would you be long on Nifty?

A: I am very bullish on India long-term. We are long-term investors and India is a very attractive proposition for long-term investors and I remain bullish. From the hedge fund perspective, the trading component is important, so there will be fluctuations. But for investors; long-term investors, pension funds, insurance companies who access equity markets through equity long-short segment of the hedge funds world, for them India remain an attractive proposition I should say.