Hedge funds account for 90% of FII sales

Hedge funds accounted for nearly 90 per cent of the Rs 16,000 crore worth stocks sold by foreign institutional investors since July 27.

Top officials of foreign brokerages said except for the long-only hedge funds, other hedge funds have been selling continuously this month.

"Yes, we have seen selling by hedge funds in India, and no major buying by other foreign clients," said a senior executive of a Europe-based foreign brokerage.

Though hedge funds have been denied direct access to domestic markets, there are several hedge funds operating in the Indian markets.

Most hedge funds participate in Indian stock market through participatory notes "� an offshore derivative instrument issued by India-registered brokerages where the underlying is Indian equities. Nearly 30 per cent of the FII investments of ($48 billion) are through the PN route.

The sales could be attributed to selling spree by hedge funds, which may be facing redemption pressures due to problems in the subprime market in the US.

Alexander J Mearns, chief executive officer of Eurekahedge, a hedge fund tracking firm said that the Eurekahedge India Hedge Fund Index was up 14.8 per cent year-to-date.

"Indian hedge funds have had a good year until July 07. However, we do expect a correction in August." He declined to name the India-specific hedge funds.

There are more than a dozen India-specific hedge funds, operating from various offshore centres including Singapore, Hong Kong, Dubai and London.

They are Kuvera Capital, Avatar Investment Management, Monsoon Capital, Amoeba Capital Partners (run by Ashutosh Sinha, who was earlier managing director and head of investments for Asia ex-Japan at Morgan Stanley), Helios (run by Samir Arora, who was chief investment officer of erstwhile Allianz Capital in India), India Capital Fund, Atyant Capital India Fund, Boyer Allan India Fund, Baer Capital Partners, among others.

At least half a dozen foreign funds, which are renowned for their hedge fund strategies, are operating directly in India by registering themselves with the Securities and Exchange Board of India. They include Italy-based Aletti Gestielle Societa, Toronto-based DGAM Emerging Markets Equity Fund, Karma Capital Management and Blackrock Advisors.

A senior stock market commentator, who is advising one of the hedge funds for their Indian operations, said the selling by hedge funds were due to redemption pressure from investors. He added that the trend would reverse once the subprime turmoil in the US settles down.

"Already, we are witnessing some sort of slowdown in the sales orders, compared to one week back," he said.

Hedge funds adopt different strategies such as long/short, long-only, arbitrage, event driven, multi-strategy and macro, based on which they collect funds from investors.

Last time, the Indian markets witnessed similar selling pressure from FIIs was during May 2006, when the FIIs sold about $2.75 billion (Rs 11,000 crore).

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Nearly 30 per cent of the FII investments of $ 48 billion are done through the participatory notes route

Hedge funds are facing redemption pressures due to problems in the subprime market in the US

There are more than a dozen India-specific hedge funds operating from various offshore centres including Singapore, Hong Kong, Dubai and London