Article Published by The Asset Magazine

Indias first market-neutral hedge fund

The Asset October 2010 by Bayani S Cruz
With only 40 to 50 hedge funds, Indias hedge fund market is still at a nascent stage of development. Most of these funds are in equity, investing more long-only than long/short. The others concentrate either on the mid-cap space (where they employ value-investing strategies with little, if any, hedging), on private equity investments, or on companies at the pre-initial public offering stage. The principal challenge for the development of the hedge fund industry in India is that the markets are strictly regulated. For example, an overseas fund manager has to be registered as a foreign institutional investor to be able to invest in the Indian markets. On the debt side, foreign investors have to assume limits on their debt holdings before they can trade. Its pretty tough. That explains why there are no major players here and why we are limiting the maximum size of our fund to US$125 million, because anything beyond that would actually shake the market. These are our own internal limits which we set after surveying and checking out the market, says Ashwani Singh, joint managing director and head of the global sales team of CapVeda Capital (India) Advisory Private Limited, which claims to be the first market-neutral hedge fund in India. CapVeda was formed by a team of veteran traders and fund managers with extensive knowledge of the Indian markets: Kalpesh Kinariwala, founder and chief executive officer; Dharmin Mehta, director and chief operating officer; and Singh. CapVeda team was founded in 2009, when it began operating a proprietary fund with a seed capital of US$8 million. On April 1 2010, the proprietary fund was closed and CapVeda launched its first hedge fund for which it is currently raising funds. The team targets to raise as much as US$125 million in assets under management, according to Singh. Three-step launch Before launching the fund, CapVeda followed a three-step process in developing its hedge fund business. First, it back-tested its investment strategy for up to five years in order to check how the strategy performs based on historical data from 2005 to 2009. Second, it put up its proprietary desk with its own seed capital. The proprietary desk operated for three years before the launch of the hedge fund in April 2010 which allowed the investment team to study and refine its strategies against actual market conditions. In 2009, the proprietary desk was audited by a team from international auditing firm Deloitte which attested to the fact that the proprietary desk posted returns of 27.21% for the eight-month period covering April-November 2009, effectively validating CapVedas strategy. During this period, the proprietary desk posted an annualized standard deviation of 8.46%, an annualized sharp ratio of 3.76, and an average mean return per month of 3.28%. Third, following the audit by Deloitte, CapVeda decided to unwound its proprietary desk, which it did from December 2009 to March 2010, and to launch its new hedge fund. Four strategies The CapVeda hedge fund is a Mauritius-domiciled fund designed for institutional and private bank investors. It employs four investment strategies. In terms of exposure limits, 40% to 50% of the fund is invested in relative value strategies, 30% to 40% in algorithmic momentum trading system (AMTS) strategies, 15% to 20% in volatility strategies, and 10% to 15% in arbitrage strategies. Its flagship is the relative value strategy where CapVeda trades only futures and options. Since theres not much liquidity in the Indian market where there are roughly 80 liquid futures and options stocks, we have created about 800 synthetic stocks and we trade between them. We are perhaps Indias first market-neutral hedge fund and by market-neutral we mean uni-directional, so that allows us to take returns irrespective of market movement, Singh says. The second principal strategy is AMTS, a quantitative high-technology strategy. With AMTS, we try to follow the market trend. With AMTS it doesnt matter whether the trend is upwards or downwards, as long as there is a good trend. Then we try and hedge within the strategy itself, Singh says.