Onshore hedge funds beat offshore peers in volatile election year

Have given positive returns compared to losses for offshore funds

Hedge funds located in India seem to have had an edge ahead of the elections. They have beaten offshore India hedge funds, reversing a period of underperformance recorded in the previous year, shows the data from global hedge fund tracker Eurekahedge.

Offshore funds were down 1.16 per cent on a year-to-date (YTD) basis in 2019. Onshore funds were up 3.88 per cent, shows the data up until April. They had trailed offshore funds in 2018, having fallen 7 per cent. Offshore funds had only fallen 5.4 per cent.

Year 2018 actually saw marked departure from the previous years. Onshore funds have outperformed offshore ones in nine out of the last 10 years, including the current one. They also fell less than the offshore ones during the financial crises. Offshore funds were down 61.24 per cent in 2008. Onshore funds fell 51.79 per cent. They also bounced back in 2009. They were up 66.85 per cent, compared to offshore funds’ 53.42 per cent. Onshore Indian hedge funds tracked by Eurekahedge manage assets of $1.1 billion. Offshore India hedge funds account for $3.8 billion.

Vaibhav Sanghavi, co-chief executive officer (CEO), who is part of a hedge fund at Avendus Capital Public Markets Alternate Strategies, said that onshore fund managers have greater access to resources on the ground and can tap people who might have an edge in fund management. This makes a difference because of the ability to quickly detect what’s happening at the ground level, and may not be revealed by numbers alone.

“There are a lot of softer components which go into the decision-making,” Sanghavi said.

“Various factors, including time differences and the ability to react on a real-time basis to news events, can help local fund managers outperform,” said Piyush Garg, chief investment officer at ICICI Securities. He added there is an information edge when a fund manager is located in the market in which he operates in because of his proximity to the action. “You will be more clued in,” Garg said. 

Overall, the Eurekahedge India Hedge Fund Index has given a 9.13 per cent annualised return over the last 10 years. This is better than the 8.15 per cent for the Eurekahedge Emerging Markets Hedge Fund Index. Both Latin American funds and those focused on China have provided higher 10-year annualised returns. The Eurekahedge Latin American Hedge Fund Index is up 9.45 per cent.  The Eurekahedge Greater China Hedge Fund Index is up 9.71 per cent.

A monthly note from the hedge fund tracker for April showed that internationally, funds, which bet on stock markets rising, did the best. Those which bet on higher volatility trailed other strategies.

“Roughly 72.4 per cent of the underlying constituents of the Eurekahedge Hedge Fund Index posted positive returns in April. Fund managers utilising equity long-biased strategies maintained their place at the top, with 11.72 per cent gain over the first four months of the year, while at the other end of the spectrum, long volatility strategic mandate was down 8.27 per cent YTD, as market volatilities remained suppressed throughout the year,” it said.

Volatility may well increase with trade tensions rising in recent days. The US increased tariffs on Chinese goods on Friday. China had said on Monday it would retaliate. 

Ramanathan Krishnamoorthy, founder and CEO at Spectrum Wealth Solutions, who advises clients on hedge fund investments, said that lack of leverage among Indian hedge funds and their tax treatment are factors which can affect their attractiveness. Future returns for equity-focused hedge funds in India will depend on the outcome of liquidity issues after the recent non-banking financial company crisis and the outcome of the elections. “Politics is important,” said Krishnamoorthy.