US hedge funds back again

Return points to the possible buoyancy in the Indian markets.

A bunch of US-based hedge funds which had taken a longish break for the last six months is back again in the Indian markets, this time focused largely on the derivatives segment.

"Around 20 of the top hedge funds have returned to the Indian stock markets," said Falguni Nayar, executive director, institutional equities, at Kotak Securities.

Incidentally, at least 10 of these hedge funds have set up their own offices in India and are recruiting local talent.

The return of hedge funds can be a pointer to the possible return of buoyancy in the Indian markets. Market sources said the funds could be driven by the possibility of Indian interest rates rising faster than US interest rates.

"It could be yield play, but it is too early to tell," industry sources said, adding that the action now is all stock specific.

Hedge funds, which are interested only in absolute returns as a matter of policy, are not playing the index but are arbitraging between the cash and futures market. Some of the counters on which they are operating are Satyam, Infosys, State Bank and some auto stocks.

Figures show that the share of foreign institutional investors (under which category hedge fund operations are clubbed) in the derivatives segment which was hovering close to 30 per cent earlier this year had dwindled to around 11 per cent in July and early August.

This has since gone up to 24-25 per cent. FII trading in derivatives makes sense only if they can generate returns of at least 100 basis points. At present, the bulk of FIIs don't even make 60 basis points, industry sources said.

There has been a distinct change in hedge fund trading strategies since they have become more familiar with the Indian markets. Previously it used to be a pure index play. But a micro-perspective has led them to bet on specific stocks.

This is another reason for setting up an establishment in India, apart from being ready to take the plunge when the Securities and Exchange Board of India decides to allow hedge funds to register here.