Some of the world's top hedge funds have been granted direct entry into the Indian stock markets, nearly three months after the Securities and Exchange Board of India imposed curbs on foreign investments through the participatory note (P-note) route.
Since the curb, the number of FIIs in India has swelled by 123 to 1,248.
The funds include Vikram Pandit-founded Old Lane LP, which was acquired by Citigroup early last year, and Oz Management, which is ranked among the world's 20 largest hedge funds.
While putting the restrictions, Sebi had asked the funds to invest in the Indian market directly by getting themselves registered as foreign institutional investors (FII).
Some of the other hedge funds that have been given FII status include Eton Park, which recently bought 5 per cent stake in Reliance Mutual Fund, California-based Oaktree Capital Management and Ecofin.
Old Lane, founded by Pandit, John Havens and Guru Ramakrishnan (all former Morgan Stanley executives), is a multi-strategy hedge fund. Pandit was appointed as the top boss at Citigroup late last year.
Oz-Ziff Capital Management, which was started in 1994 by hedge fund manager Daniel Och, was recently in the news for making big investments in Manchester United, the iconic British soccer team.
Though there are no reliable data on the number of hedge funds operating in India, industry players reckon that there could be at least 100 India-focused hedge funds which were investing in Indian stocks mostly through P-notes.
"Hedge funds are no different from some of the other institutional investors in India. They have very sophisticated tools to manage risks. They will bring in a new class of investors into the Indian market," said Alok Sama, founder and president of Baer Capital Partners, which is planning to launch a dedicated India-hedge fund.
"India-specific hedge funds manage anywhere between $50-100 billion worth assets," Sama said. Globally, hedge funds manage assets worth over $2 trillion.
A fund manager, who advises a Singapore-based hedge fund, said that the hedge funds are entering the Indian market after the liberal registration procedure enforced by Sebi. "These are not new funds. The capital raisings by hedge funds peaked in 2005 but tapered off in mid 2006," he said.
Perhaps, the biggest of the new hedge fund registrations is that of Old Lane, which manages close to $3 billion worth assets. Old Lane was registered on December 17, 2007.
Analysts at brokerage houses said the recent volatility in the small and mid-cap stocks could be due to the entry of hedge funds, which play the high-risk, high-return game.
But Sama begs to defer. "Hedge funds concentrate mostly on very liquid large-cap stocks. Small and mid-caps are not very liquid counters and, hence, they are avoided."
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