Indian hedge funds lag market surge amid Covid spike and lockdown

Hedge funds in India typically come under AIF structures, many are managed to ensure clients' assets are protected and aren't focused on delivering massive returns

Investment vehicles favoured by the wealthy have given lower than market returns, amid a surge in equities despite Covid-19.

Hedge fund managers typically try to protect the downside risk for investors, say experts. This helped them outperform significantly during the worst of declines in March. Global hedge fund tracker Eurekahedge data showed that local funds represented by the Eurekahedge India Hedge Fund Index were down only 10.57 per cent compared to a 23.05 per cent decline in the S&P BSE Sensex. The Sensex is a 30-stock index which is seen to be representative of market performance.   

But they lagged in April and June, the two months that saw the benchmark end with gains after the lockdown was announced in March. The Sensex was up 14.42 per cent in April. The Eurekahedge India Hedge Fund Index was up  6.05 per cent. The Sensex rose 7.68 per cent in June. The Eurekahedge India Hedge Fund Index was up 5.79 per cent.

Volatility is a friend for any hedge fund manager, according to Daniel G M, founder-director of portfolio management services (PMS) and alternative investment fund (AIF) industry tracker PMS Bazaar. Hedge funds in India typically come under the AIF structures and have a minimum investment of Rs one crore. Many are managed to ensure that their clients’ assets are protected rather than focusing on delivering outsized returns, he said.

“They will try to protect...capital,” he said.

The surge in markets comes despite a rise in cases of Covid-19.  Governments across the world initiated lockdowns to control the pandemic’s spread. Businesses have taken a hit and stock markets fell globally. Governments and central banks made more money available at lower interest rates for people to borrow in a bid to cushion the economy.  Large sums of money chasing growth are said to have resulted in a surge in global markets, even as businesses continue to struggle.

“Fiscal and monetary stimulus programmes in both advanced and emerging markets have helped stabilise financial markets and provided temporary relief to companies. However, the operating performance and financing capability of companies are vulnerable to financial market shocks, particularly if a second wave of infections results in renewed lockdowns,” said a July 16 note by rating agency Moody's Investors Service about the Asia Pacific region.

New data coming from India’s high frequency indicators shows that there are challenges to coming back to levels of economic activity that one had seen before Covid-19.

“Our proprietary economic indicator was flat for the second consecutive week (at 81 per cent of levels seen before Covid-19) ...indicating that the initial surge owing to pent-up demand is now behind. Rising...cases driving local lockdowns also likely played a role,” said the July 21 Equity Strategy report from brokerage firm Jefferies India authored by equity analysts Mahesh Nandurkar and Abhinav Sinha.

Meanwhile, the S&P BSE Sensex has recovered from its March low of 25638.9 to close at 37,871.52 on Wednesday.

Indian hedge funds have outperformed their peers in other emerging markets in both April and June. The Eurekahedge Emerging Markets Hedge Fund Index was up 5.17 per cent in April (6.05 per cent for the India hedge fund index), and 5.44 per cent in June (5.79 per cent for the India hedge fund index).