Hedge funds and foreign currency convertible bonds (FCCBs) are replacing real estate as popular offshore investment destinations for India’s richest.
Hedge funds are investment funds which employ various strategies to produce absolute returns. These strategies could be long- short, event driven, arbitrage or of various other types. A long-short strategy involves buying stocks which are assumed to perform high and selling stocks which are assumed to perform low.
As hedge funds are considered to be a high risk asset class, they are recommended to only a few “ultra high net worth and sophisticated” clients only. "Currently we are recommending 10-15 per cent allocation in strategies such as long -short and arbitrage to well-informed HNIs", said the head of a private bank. The returns range from 12-15 per cent annually in dollar terms.
The $ 200,000 window provided by RBI is being increasingly used by non resident Indians and ultra high net worth individuals to invest in these products. While fixed income is the only option left in India, HNIs are trying to boost their returns through offshore investments.
Mostly, prior to investing, the money from HNIs is pooled as a fund and then invested across various asset classes and strategies globally. For example, Macquarie globally offers something called an absolute return fund wherein the money is invested across event-driven strategies and arbitrage strategies. Wealth managers said that similar products are offered by other foreign investment banks also.
As hedge funds invest in multiple strategies, the returns are not co-related to the equity index they invest in. Hence, even if the index gives negative returns, the fund does not.
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While the size of market is not known, according to a RBI report, $580 million has been invested overseas through remittances. However, experts said that the market for these kinds of offshore investments could be much larger as a lot of offshore money parked in the overseas accounts could be in a disguised form through various tax havens.
Although, legally RBI does not allow a foreign private bank to offer these kinds of products to Indian customers, such products are offered through domestic wealth management companies. They act as a facilitator and market these products to ultra HNIs.
FCCBs are the other investment option."Our clients are quite interested in FCCBs, which have been trading at a huge discount and some of them are currently offering an YTM (yield to maturity) of 27-28 per cent", said K Ramachandran, head of investment and product at Barclays Wealth.
"Some of our HNI clients have bought Mahindra & Mahindra FCCB", said another wealth manager.