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Hedge funds produce solid returns

Sep 24, 2003, 12.22am IST


Mad, bad and dangerous, hedge funds once offered cocktails of stratospheric rewards and
giddying risks to investors rich enough to spare a million dollars or more. The industry has
changed, although its rakish image remains. Since the bear market set in, hedge funds have
produced solid rather than spectacular returns. And they are no longer the preserve of the very
wealthy. Mainly through outfits known as funds of funds, institutional investors and less rich (if,
in the main, still pretty well-off) individuals are being offered a taste of the hedge funds'
glamour.
As their name suggests, funds of funds spread their clients' money among several hedge funds.
The idea is that investors will enjoy the fat returns that hedge funds can bring, but that
diversification will diminish the risk. Not surprisingly, an increasing number of investors are
attracted by this notion. However, the rewards have so far been disappointing. To choose their
hedge funds, managers of funds of funds go to remarkable lengths. They not only tour the world
assessing funds, but also might hire private investigators and delve into the private lives of
hedge-fund managers (might an impending divorce be a distraction?). After many months, they
select a portfolio, usually of between five and 25 hedge funds.

Funds of funds now account for about 30% of the $650bn invested in hedge funds. According to
Hedge Fund Research, a research company, the value of assets in funds of hedge funds doubled
last year. Inflows rose five-fold, to $103bn. The number of funds of funds increased from 550 in
'01 to more than 780. Most offer tailor-made funds for some clients such as a Swiss private
bank as well as off-the-peg funds for less exalted investors.
European institutional investors already include a Swedish state pension fund and PGGM, a
Dutch pension fund with $50bn under management. In Britain, the pension funds of Shropshire
county council, Sainsbury's, a supermarket chain, and Pearson, part-owner of The Economist, are
thinking about joining the trend. In a recent survey of 341 European institutional investors by JP
Morgan Fleming, 56% said that they were planning to invest more in hedge funds. Of these,
nearly two-thirds would choose the funds-of-funds route.
In the US, hedge-fund investment, which among institutions used to be largely confined to
endowment funds, is spreading to pension funds and insurers. The California Public Employees
Retirement System, America's largest pension fund, is thinking about tripling the $1bn pledged
for investment in hedge funds and funds of funds. So alluring are funds of funds that investors
are willing to pay a double whack of fees to place their money. They pay a management fee of
between 1% and 3.5%, plus a performance fee (except at some funds where management fees are
higher). On top of this, the underlying hedge funds charge management fees of 2% and one-fifth,
or more, of profits. Investors also have to accept that they will never really hit the jackpot. One
of the hedge-fund managers in their portfolio may be the new George Soros; but that means that
the rest of the money is with people without the same golden touch.
So what do investors get for their fees? They hire funds-of-funds managers' inside knowledge:
these specialists know their way through the maze of hedge-fund strategies, from long-short
equity funds, which buy undervalued equities and short-sell those they deem too dear, to "macro"
funds, which bet on any security, anywhere. Investors also buy access that was once exclusive:
people with as little as $1,000 can invest. Funds of funds are more open with their clients, and
more liquid, than hedge funds. At GAM, one of the biggest, investors can redeem their money
within five days. Hedge funds generally ask investors to lock in their money for three months;
some insist on a year.
All of this means that investors have to sacrifice the thought of truly juicy returns, although such
returns are precisely why many are drawn to funds of funds in the first place. "The question is
how much of absolute returns are you willing to give up for a fund of funds," says David Smith,
chief investment director at GAM. In the first eight months of this year, says Hedge Fund
Research, hedge funds returned 12.2% on average. Funds of funds made 6.5%. Last year was the
only one of the past ten in which funds of funds did not trail the company's hedge-fund index.
After taking such care to seek out the world's finest hedge funds, funds of funds might have been
expected to do better than this.


Karvy Capital launches first hedge fund
PTI Jun 18, 2013, 05.38PM IST
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(Karvy Capital, the asset)
MUMBAI: Karvy Capital, the asset management arm of financial services provider Karvy
Group, on Tuesday launched first hedge fund named 'systematic edge fund'.
According to the company, this fund is an open-ended category-III AIF (alternate investment
fund), under the AIF guidelines issued by market regulator Sebi.
"The systematic edge fund is a multi-strategy absolute-returns hedge fund and targets delivering
positive returns across all equity market scenarios. We hope to garner around Rs 100 crore in
next two months from HNIs and select institutions," Hrishikesh Parandekar, Chief Executive and
Group Head for Broking, Wealth Management and Asset Management, told reporters here.

He claimed that the initial response to the new fund from investors has been sound.
In May last year, Sebi had issued regulations for AIFs and opened the way for local hedge funds.
Before these regulations, while foreign hedge funds were allowed to invest in domestic equities,
domestic firms were not permitted to launch such funds.
However, after these norms, many domestic asset management companies have applied for
launching hedge funds.
On its investment strategy, Karvy said the hedge fund will invest in futures and options of equity
stocks and indices.


Delhi-NCR right market for local hedge
funds: Ankit Chaudhary
Shivendra Kumar Singh, ET Bureau May 16, 2013, 06.03PM IST
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Ankit Chaudhary
Government's decision to allow local hedge funds to operate in the country will be a challenge
for fund managers. However, Delhi-NCR may turn out to be the right market. Ankit Chaudhary,
derivative analyst, Analyse India spoke to ET about its prospects. Excerpts:
Do you see this as a welcome step considering that it will pave a wider base for the foreign
as well as local investors?

Yes, this is a welcome step. Till recently Indian firms were not allowed to launch local hedge
funds but after the capital market regulator, Sebi, in May last year allowed setting up such high-
risk, highreturn investment funds, it is likely to provide an extra option for local and foreign
investors who have an inclination towards alternative products. There is a definite need for a new
offering like a hedge fund that allows asset allocation, hedging, diversifying & is extremely
flexible in their investment options.
What is your take on investors' attitude in Delhi/NCR?
Delhi, Gurgaon and Noida will play a very big role as far as hedge fund investments are
concerned. These are places where there are a lot of HNIs and ultra rich investors who would be
keen on diversifying their investment portfolios. These investors generally look for high returns
and also have the capacity to bear risks.
What will be the benefits of such funds?
Ability to generate positive returns in both rising and falling equity markets by taking both long
and short positions; providing the investors with a wide choice of hedge fund strategies to meet
their investment objectives and reducing portfolio risk with diversification, hedge funds certainly
score over the traditional mutual funds. By trading in equities, commodities, currencies, debt,
futures, options, swaps, forwards and derivatives, the primary aim of most funds is to reduce
volatility and risk while attempting to preserve capital and deliver positive returns under all
market conditions.
We still don't have a right market for such investments so according to you how much time
will it take for it to make its presence felt?
Homegrown hedge funds are likely to provide enormous opportunities for providing fund
management and advisory services to the growing HNI's and corporate segment. As this would
be a newly launched investment product, it will take minimum 1-2 years to create a market for
itself. But Delhi, Noida and Gurgaon have a distinct advantage over other NCR towns and tier 2
and tier 3 cities. It will be easier to build a decent customer base here. To start with, the fund's
AUM could be of Rs 20-40 crore but over the next few years, hedge funds should try to show a
decent track record and a strategy in place to win the confidence of wealthy investors, which
should result in more investments.
It appears that there is some skepticism about the success of hedge funds among the fund
managers in the Delhi/NCR region
We feel that small and medium size funds may get successful if they choose the right hedge fund
style and have a decent track record to show to investors. But we are skeptical about large hedge
funds as they would be reluctant to invest $500 million to $1 billion. To start a hedge fund with
this big corpus is not viable in India as Indian markets are not mature enough to absorb such
large sized funds. We know how a little action from FIIs can impact our markets drastically so
there is no point of introducing such big size funds till there is ample liquidity to handle typical
hedge fund activities like quick profit-booking or squaring off large positions.

There is hardly any awareness amongst people, which puts hedge funds in a tricky
situation. How do you plan to educate people about the pros and cons of such investments?
To create awareness amongst investors a hedge fund should conduct as many road shows to
introduce their new product offerings and also to educate the investors about the differences
between traditional mutual funds and hedge funds. We also believe that Delhi, Noida and
Gurgaon have a sizeable number of people who have some basic understanding of investment.
They can be taught comparatively easily. The investors should also be educated to avoid the
misconception that hedge funds are responsible for stock market crashes. A hedge fund should
also focus on pre-marketing activities like to zero in, in the cities where its product would get
launched. The success of a hedge fund is also dependent on finding the right talent for operating
the fund. A good hedge fund manager needs to have a good understanding of the complexities of
hedge fund management and should be competent to handle complex trading strategies. Hedge
fund managers need to be transparent to win the trust of institutional investors and they should be
experienced to deal with extensive regulatory demands.
Hedge funds were devised to mitigate risk and maximize returns at the same time.
Speculative in nature, and based on complex algorithms they appear more risk prone...