Indian hedge funds seek foreign money

Hedge funds launched by domestic financial services firms might soon approach the Foreign Investment Promotion Board (FIPB) for approval to get foreign investors to put money in these products.

A ‘trust’ is one of the routes available for hedge funds to structure their products but many would prefer this because of certain tax benefits. But, under the trust structure, the hedge fund is required to get FIPB approval if it wishes to receive foreign funds.

“There has been some discussion among the players. The approach (to FIPB) may be in a collective fashion, as a group; or individually, for the clearance,” said a person directly involved in the matter. 

Suresh V Swamy, executive director, tax and regulatory services, at PricewaterhouseCoopers, said a trust structure could provide tax benefits to hedge funds otherwise only available to a venture capital fund (VCF). “Income tax pass-through status is available only to VCF under Category I-AIF (Alternative Investment Funds). No express pass-through status is provided for other AIFs. Pass-through status could possibly be achieved in case AIFs are taxed as trusts… However, (foreign) investment in trusts would need prior FIPB approval,” he said.

The fledgling Indian hedge fund sector is looking to bring in foreign money as the initial response from domestic investors to this product has been tepid. Hedge funds, or schemes which are aggressively managed, focus on tailormade investment methods such as the long-short strategy, still relatively alien to India. 

Since the Securities and Exchange Board of India (Sebi) came out with rules for hedge funds under the AIF regulations in 2012, 10 funds have been registered. These include IIFL Opportunities Fund, Motilal Oswal Alternative Investment Trust, Ambit Alpha Fund, Forefront Alternative Investment Trust and Karvy Capital Alternative Investment Trust.

The chief executive officer of an entity which has launched a hedge fund said it might use multiple routes to tap foreign investors. “There

may be some who prefer to come in through alternative funds set up outside the country. Others may want to invest directly in the Indian fund. It makes sense to be open to both avenues, so that the needs of both these investors can be addressed,” said the person. 

Sceptics said it would be a challenge for domestic hedge funds to bring in foreign money, as their foreign India-centric funds have seen their assets under management fall by at least 50 per cent in recent years.  The bearish phase has resulted in many hedge funds shutting shop, too.

A ‘2013 Hedge Fund Outlook’ report from auditing and consultancy firm Deloitte suggested there was a lot of global appetite for AIFs because of tepid returns in traditional asset classes. “Institutional investors’ appetite for alternatives continues to increase as bond yields hover near all-time lows, public pension underfunding approaches record levels and equity market volatility up-ends more traditional investments. The average institutional allocation in hedge funds is about 10 per cent and is expected to double by 2016,” said the report.

DOMESTIC HEDGE FUNDS: EYEING FOREIGN TRYST

Many hedge funds set themselves up as trusts

The trust structure provides tax benefits 

Now, these funds are also looking to tap foreign investors 

However, they need FIPB nod for getting foreign funds 

Discussions have taken place to approach FIPB collectively for its approval

HOW IT WORKS

What's a hedge fund?

A hedge fund is a broad term used to describe any fund which looks to generate returns, usually through short-term trading calls and use of leverage 

What's the scenario for hedge funds in India?

They are relatively new, with regulatory guidelines for such funds only coming out in 2012. Less than a dozen have registered themselves since the rules came into force

How is the scenario globally?

Hedge funds manage $2 trillion across the world