Opportunity visible in India: UBP

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The hedge funds' return in 2007 are expected to be biased towards equity rather than debt. Jan-Erik Frogg, Head of Alternative Investments at Union Bancaire Privée, UBP, discusses the outlook on hedge funds outlook globally and for India.

He has indentified six hedge funds operating in India. Fundamentally speaking, he says the Indian story is very strong, and while he is interested in putting more money in India, finding value is a task.

Excerpts from CNBC-TV18's exclusive interview with Jan-Erik Frogg:

Q: We have a report from you that says that you are expecting the hedge fund industry as a whole to perform better on the stock market front than the bond market front in 2007. Would you be able to explain the rational for the same?

A: We have that rational generally because relative valuations, in a nutshell, of equities versus bonds are very attractive at this moment. One way to measure that is by the fact that equity yields stand at about 2.5% versus cost of debt, as measured by Triple B debt, which would be around 5%. So you have a strong positive spread between the two, which as an example, would excite  any CFO of a company to take out more debt and buyback his shares.

Q: How would you look at the regional spread in the early part of 2007? Would you say that you would see hedge funds go into dollar assets or would you say that they would prefer emerging market assets?

A: I think both of the areas will be of interest to any hedge fund. We look at it on a more regional basis, the way we spread it, we generally think that there will be a very positive momentum going forward in emerging markets globally. We think that the whole BRIC story is a very strong story; particularly strong if we look at India.

We will be looking to allocate ourselves in these regions to benefit from the strong growth even though in a country like India we have seen recent very high valuations. The hedge fund expertise that we find in the US stock market or the European stock market have been around for much longer and therefore are simple in terms of experience, quality and structure of somebody's hedge funds as well as the opportunities that very strong stock pickers are able to find. We will of course maintain significant exposures to these more mature markets as well. But the BRIC story or the emerging market story is a big opportunity for future growth as well as profits.

Q: Would you stretch that logic to India as well in context to the amount of money that you run here domestically (a) how much money do you run here and (b) would you look to increase that exposure more through in the stock markets part the better part of 2008 and if so how much?

A: It is difficult to put an exact number to it. Clearly as I mentioned before because of the existing opportunities we are interested in allocating more money to the region. But there is a difficulty for us is in finding the correct opportunities particularly when you are looking at it through the hedge fund world.

We have very strict criteria in terms of structural set up, the infrastructure involved with somebody's hedge funds that we look at very closely when we approve hedge funds that we allocate money to. And as a consequence of that it's relatively difficult in some of the newer areas of the world to be able to allocate substantial amount of money.

But we have one specific effort going on in India where through a consultant that we are working with we have identified about 60 hedge funds that are based in India, working on the Indian market, and we expect that this could lead to 3-4 hedge fund opportunities for us to invest with, for example. In terms of the amount of capital unfortunately, I don't expect it to be very significant initially. But it would grow over time.

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