Aug 05, 2011, 03.35 PM | Source: CNBC-TV18

India hedge funds see mild negative outflow: Eurekahedge

Farhan Mumtaz, Hedge Fund Analyst, Eurekahedge Group said that in a global sell-off situation, fund managers maintain low cash exposures.

Farhan Mumtaz, Hedge Fund Analyst, Eurekahedge Group
Taking cues from the plunging US market, the Indian market opened on a weak note on Friday. Experts feel that the domestic market is likely to remain less volatile even if the US market breaks down further. However, hedge fund managers follow different strategies when it comes to dealing with situations like a global melt down. 

Speaking to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Farhan Mumtaz, Hedge Fund Analyst, Eurekahedge Group said that in a global sell-off situation, fund managers maintain low cash exposures.

As far as the outflows from the Indian hedge fund sector are concerned, Mumtaz said that funds focused on India have seen marginal negative outflows.

“Currently, the hedge funds are focused towards North American and European economies,” he added.

Below is a verbatim transcript of the interview. Also watch the accompanying video.

Q: In this initial burst of global melt down, where are people of your type going for shelter? Is it going into cash or it the money going into Gold?

A: A lot of mangers have mentioned that they were maintaining a low net market exposures and high cash volumes, and that was one of the themes that they had adopted earlier. They mentioned that they were going to be cautious for the next couple of months. They were expecting a correction in the market.

Q: What about Gold? Are hedge fund managers attracted to that metal or is the hedge fund mood now that Gold is where Silver was and perhaps its overdone?

A: Some of the managers have actually indicated that they do expect further strengthening in Gold. However, the CTA-managed future hedge funds that do invest in commodities have benefited significantly over the last month.

Eurekahedge CTA-managed futures index was up 2.88% in July and this was the best performing index across all strategies. So, definitely they have benefitted from that rally as well.

Q: We are just trying to understand whether the outflows from the Indian hedge fund sector have exacerbated in the recent past. I think at the start of 2011, it was somewhere around USD 4.5 billion. How much has the size of the Indian hedge fund sector deteriorated?


A: Indian hedge funds, which are focused on India, have witnessed marginally negative outflows. Currently, the size of sector would be USD 3.8–4.2 billion. There is no accurate way of putting that and there have been some broader mandated funds such as Asia Ex-Japan funds which also invest in India.


Some of these large funds that invest overall in Asia Pacific have attracted some assets in entire Asia, while ex-Japan funds have attracted USD 6 billion throughout the year.


Q: India saw a lot of fund inflows until mid July, what’s your hunch? Was that hot money?


A: At this point, it is hot money, which is going to be there for a longer period of time. Overall hedge fund investors tend to be long-term investors. As far as the size of the Indian hedge fund industry is concerned, it has remained between USD 3.5 -4.5 billion since a past few years.


Q: If hedge fund investors are long-term investors, what are they doing now? There seems to be a lot of assets which are mouth watering compared to even a few days ago?


A: Since the beginning of the year, the hedge fund industry has seen USD 120 billion inflow, which is the strongest asset flow for hedge funds in past ten years. Most of this money has actually gone towards larger funds and towards the more developed economies. It has gone to the North American funds as well as European funds.


More recently, we have seen the strong inflows petering down and over the past two months, they have been marginal when you compare it to the greater sector. At this point, investors have also indicated that they are going to be sitting on high cash volumes.


Q: What is the trend for August?


A; The absolute return funds have been focused on emerging markets for a while but they also indicated that they will be lowering their net exposures. They will be maintaining high cash volumes for at least for the next 2-3 months and this is what we have been hearing since June.


Q: So do you think India would be at the lower rung of the preference ladder within the emerging market basket because of more complications like higher interest rates, high inflation, etc?


A: This issue has been highlighted by some managers. They will be keeping an eye on the economic indicators to see that unless there is some significant improvement, they will not be actually going long on India in the next few months.


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