Indian hedge funds break winning streak

End year-long winning streak; fall in mid-cap and small-cap firms and Budget volatility seem to have contributed to the downside

Hedge funds which allocate money to only Indian securities showed losses last month for the first time in a year,as stocks of smaller companies underperformed. Volatility around the time of the Union Budget also weighed on returns, said fund managers.

“India-focused managers were down 0.51 per cent during the month, their first of negative returns after a 12-month winning streak,” according to a note from hedge fund tracker Eurekahedge.

The fall came as peers investing in other regions enjoyed gains. Russia and Europe, both of which had seen negative returns on account of sanctions and fears of Greece's exit from the euro zone, outperformed Indian hedge fund players. Other emerging markets also did better.

“Eastern Europe and Russia hedge funds saw their first gain in eight months, with the Eurekahedge Eastern Europe & Russia Hedge Fund Index soaring 12.49 per cent...European managers came in second place, gaining 2.39 per cent in February and 3.56 per cent year-to-date, which outstripped returns for the entire year of 2014, buoyed by strong underlying markets as the MSCI Europe Index gained 6.09 per cent during the month,” it said.

 

Emerging market hedge funds were up 1.98 per cent, while Japan gained 1.27 per cent. Indian equity markets were marginally up during February. The S&P BSE Sensex, whose returns are held as representative of how the market is doing, was up 178.55 points from 29,182.95 to 29,361.50, or 0.6 per cent.

Anuj Didwania, managing director, Redart Capital Advisors, which runs an Indian hedge fund, said concentration in lower capitalisation stocks might have affected the returns.

“It seems all the funds are in similar kinds of positions. February was the first month that small-cap and mid-cap stocks gave a negative return. My guess is that most fund managers are concentrated in mid and small-cap stocks, which is what led to the negative return,” he said.

Vaibhav Sanghavi, managing director, Ambit Investment Advisors, which runs a hedge fund, noted February was a month of large market movements. “It’s more to do with volatility, which has been high in February on account of the Budget. Some hedge funds could have been affected by it, which could have resulted in the lower returns for the index,” he said.

Eurekahedge data is based on around 26 per cent of funds which reported February returns as of Wednesday. India VIX, a volatility index, hit a high of 22.015 in February, its highest value in 2015.

Hedge funds had given a 5.3 per cent return in January and positive returns every month stretching back to February 2014. Total returns in 2014 were 38.8 per cent, according to Eurekahedge data, before the decline in February.

The outlook does not suggest an immediate bounce-back. “The months ahead would mostly be flat to negative, as there are no triggers. Except for the next earnings season, which should be weak, looking at current trends and curtailed government spending in the fourth quarter (January-March). Valuations are expensive and earnings will now be needed to take markets further up. This should take a few quarters, so one should expect sideways to downward markets for the next few quarters,” said Didwania.