Overseas fund exit triggers fall

Hedge funds and India-dedicated funds are pulling out money.

Significant redemption in India-focused funds is the root cause of the recent spate of foreign fund selling on the bourses.

Leading foreign brokerages confirm that the selling in recent times has been coming from hedge funds and India-dedicated funds which collected huge sums last year. Institutional fund managers and pension funds are, however, holding top their positions as yet.

In the week ended May 24, the emerging market equity funds recorded net outflows of a whopping $5 billion, or 1.74 per cent of total assets, marking their worst outflows since May 2004, according to data from Emerging Portfolio Fund Research.

More importantly, BRIC-related funds, including the country-dedicated funds which invest in Brazil, Russia, India, China saw an outflow of $1.5 billion. Withdrawals from BRIC funds alone amounted to $370 billion.

"The recent round of selling seen in our markets is driven by redemption in retail-oriented India-dedicated funds," said Sanjay Sharma, DSP Merrill Lynch.

Foreign institutional investors in India are no longer a homogeneous group and we see different kind of behaviour from different set of funds, he added.

Dinshaw Irani of Artemis Advisors, an advisor to an India-dedicated hedge fund said, "The redemption in overseas funds is leading to selling by certain foreign funds causing volatility in the market. With the change in the global investment scenario, the sentiment towards emerging markets, including India, seems to be weakening."

Overall, equity funds across the globe have lost $10 billion owing to investor outflows and shed another $65.4 billion as share prices tumbled globally over the past week.

"Inflation fears leading to uncertainty over US monetary policy and global liquidity conditions helped inspire the particularly sharp round of profit taking and panic selling in the second half of May, just as it did two years ago this month. With emerging market equity funds collective return a dismal -10 per cent over the past two weeks investors fled all major and minor fund groups," said a EPFR's weekly report dated May 29.