"Increasingly, affluent HNIs in India are using alternative investments in their portfolios over and above their existing stocks, bonds, and cash investments."
ETMarkets.com
The estimated global pool of assets in alternative investment (AI) under managing is over $10 trillion, said Jo Murphy, Managing Director- Asia Pacific, CAIA Association. In an exclusive interview with ETMarkets’ Kshitij Anand, Murphy said cumulative funds raised in India as of June 2016 was Rs 26,003 crore – a five-fold increase over 2014. Edited excerpts
What is the rate of growth in alternate investment industry? What do you classify as an alternative investment product?
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The Alternative Investment (AI) industry continued to grow strongly through 2015 and the first half of 2016. Estimates see the global AI pool of assets under managing in excess of US$10 trillion.
This asset increase is driven by investor demand as institutions globally look to diversify their portfolios to include a wider range of asset classes to generate strong returns, reduce volatility, hedge against inflation and access reliable income sources.
An alternative investment is an asset that is not one of the conventional investment types, such as stocks, bonds, and cash.
What are the avenues available for Indian investors when we talk about the emerging alternative investment industry? Does one view this as diversification strategy? What percentage of Indian investors -- direct and via MFs -- have started using this strategy?
Specifically, for India, there are three types of AIFs – category I, category II and category III, established 2012:
Category I includes start-ups, early stage ventures, SMEs or infrastructure and are closed ended.
Category II are typically PE / debt Funds with no specific incentives of concessions. Does not employ leverage or borrowing and are closed ended funds.
Category III - includes hedge funds - diverse / complex trading strategies and may employ leverage (through investment in listed or unlisted derivatives). Include both open and closed ended funds.
It refers to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP) which are not presently covered by any Regulation of SEBI governing fund management.
Increasingly , affluent, high-net-worth and family office investors in India are using alternative investments in their portfolios over and above their existing stocks, bonds, and cash investments.
Over the last two years, AIF inflows have seen a significant increase. Numbers from SEBI’s website clearly confirm this. Cumulative funds raised as of June 2016 was Rs 26,003 crore – a five-fold increase over Rs 5,204.8 crore cumulative funds raised through June 2014.
How are hedge funds different from traditional mutual funds?
Structured products allow investors to tailor the way they extract return and the shape of risk they are comfortable with. Not only can this be helpful from a risk management perspective, it’s a way for smart investors to create a volatility exposure that protects other parts of their portfolio.
Hedge funds, despite recent underwhelming absolute performance, are an effective way to access public securities markets with a mitigated risk profile. A typical hedge fund might offer 2/3 of the upside of a market investment with 1/3 the downside.
Some of the more institutionally-targeted funds ca be market neutral with very low volatility, but consistent if small positive returns. While not exciting, this kind of risk-return profile can be very helpful to an institutional asset owner.
Putting all this together takes specialist expertise. One key advantage of these asset classes is that they have different, and asymmetric, risk/return profiles. That creates very powerful diversification benefits but also means that a conventional optimization approach to portfolio construction won’t work. Allocators need training and experience, or unbiased specialist advice.
Hedge funds are scary. One of your reports quoted that the rate of liquidations of these funds is increasing? How should one read that number?
I wouldn’t say that HFs are scary! …. Hedge funds are like mutual funds in that they are pooled investments managed by a professional asset manager. Unlike mutual funds, hedge fund managers have wide discretion and flexibility on what they invest in.
Are any investor protection avenues available for Indian investors who have invested or are planning to invest in these products?
Comprehensive investor protection exists under SEBI rules in India – as all AIFs are governed by this rule book.
How many hedge funds have some holding in India equity markets? What is the kind of money that we are talking about?
Top five India-based hedge funds include names like India Insight Value Fund, Malabar Capital Trust, ArthVeda Alpha Plus, I-Alpha, And Malabar India Fund. Top five India-only invested hedge funds include names like Atyant Capital, India Insight Value Fund, Malabar Capital First, ArthVeda Alpha Plus Extreme 25, and I-Alpha.
ETMarkets.com
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