Hedge funds outperforming underlying mkts: Eurekahedge

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Foreign institutional investor (FII) inflows have been clipping in well since the past few days. Also, in July the total global hedge fund sector attracted about USD 10 billion.

Speaking about the local scenario Farhan Mumtaz of the Eurekahedge Group said about 60-70% of the managers who have come out with their July numbers reported inflows of about USD 30 million, which translates into 1-2% of the whole sector, which is pretty strong. "There is a heightened interest in hedge funds-a space which is witnessing huge amount of money flow coming in. They are outperforming the underlying markets" he confirmed.

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

Q: What sense do you get from talking to the managers? Are hedge funds receiving more capital commitment from investors in the West?

A: Investor allocation have definitely picked up to the hedge fund sector in July. In July the total global hedge fund sector attracted about USD 10 billion. Specifically in India about half of the managers have reported their July numbers and out of them about 60-70% have reported inflows.

Q: Would you be able to flesh that out a bit in the Indian context? What kind of inflows have fund managers been talking about into India specific funds?

A: In India specific funds most of the inflows have been towards the equity sector but that's not really surprising because the Indian hedge fund sector itself is about 65-70% long short equity. In July we are estimating about USD 30 million of inflow. That's about 1-2% of the whole sector which is pretty strong.

Q: Were most fund managers you were speaking with also holding higher than normal cash levels? Have cash levels been brought down aside from fresh inflows?

A: For the global hedge fund sector yes, that was very true, but for Indian managers they had been actively investing in the underlying market.

Q: How hedged are some of the Indian hedge funds right now? From the futures and options activity here, it appears that while a lot of cash commitment has gone into individual stocks, the fund managers have also hedged their positions quite significantly?

A: Definitely. Some of the managers that we speak to have said that they consider some valuations to be a bit rich at the moment, though they are being a bit cautious and they have been flexible in their positioning. If they perceive any of the movement going down, they will actively monitor the portfolio and change the positions.

Q: What's performance being like for the region and in India for these hedge funds? It's a very stock specific market here. Have they been able to generate alpha?

A: Definitely. The whole Asian sector is above the underlying markets and in July the returns were 2.56%. Indian hedge funds have particularly been performing very well. They are the best performing globally. July year to date, Indian hedge funds were up about 4.5% and that's compared to about 2.3% in Sensex. It was a similar situation in July as well. They delivered about 1.3% in terms of returns in July.

Q: Are you noticing a switch in flows as well? Is money been rerouted from assets like commodities into more equity based funds?

A: Not necessarily, because most of the hedge funds they invest in some particular asset classes. They are focused on their particular sectors. We do not see any specific movements in that direction.

Q: From managers that you speak to, do you see this trend continuing, of high risk appetite and heightened interest in hedged products or hedge fund products in this emerging market space?

A: Interest has definitely picked up in the emerging market space but they have been pretty much cautious for the whole year which is why they have protected capital in the volatile months. Going forward they are going to maintain their stance and they will definitely outperform the underlying markets.