Interview- Mr. Vaibhav Sanghvi, MD & Fund Manager, Ambit Investment Advisors & Governing Council Member- IAAIF

Vaibhav-Sanghvi Ambit

‘Hedge funds can transform India from a developing market to a developed market’
Vaibhav Sanghvi, MD & Fund Manager, Ambit Investment Advisors who manages over Rs. 1,000 crore in Ambit Alpha Fund, talks to Cafemutual about the challenges facing the hedge fund industry in India and what is it required to make hedge funds more popular in India.

How is the appetite for hedge funds among Indian HNIs?
Hedge funds are a preferred choice as an investment vehicle globally for offering risk-adjusted returns and we are gaining broader acceptance in India among HNIs. Risk-averse investors, especially those who wish to ride on the upside of the market and at the same time wish to limit downside are keen to invest in hedge funds, known as Category III Alternate Investment Funds (AIFs).

How do you go about constructing your portfolio?
How do you protect the downside? We adopt a combination of top-down and bottom-up approach. We closely track global markets and economies to determine the relative strength and positioning of India as an investment destination. We then assess the growth of our economy and determine the sectors and the stocks to invest in. Additionally, we have sectoral and stock specific caps which reduces the concentration risk. To generate returns, we have a minimum hedge in the portfolio for downside protection and reducing the volatility.

Give us an overview of how big is the hedge fund market globally.
Hedge fund industry forms a majority of the total allocation to alternates. In our estimate, alternates command an allocation close to 12% of total financial assets. We believe that the total size of hedge funds is close to about USD 3 trillion globally.

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AIF norms may let in foreign funds even in no-go sectors like e-commerce, defence machinery

MUMBAI:In its zeal to lure foreign capital, the government may have done a rushed job with the rules.

A closer look at the gazette notification released last week shows that an Alternative Investment Fund (AIF) — a pooled investment vehicle — in India can have majority or even almost the entire money from offshore investors and still buy into businesses where foreign ownership is restricted.

How? The new rules say that a fund will be considered as ‘domestic’ in nature as long as its sponsors and managers, who control the fund, are Indian. Thus, a Rs 500-crore AIF having Rs 495 crore of foreign investment can directly buy as much as it wants into companies carrying out ecommerce, or holding farm land or making defence machinery — entities where foreign ownership is either capped or barred.

While a more liberal AIF regime is aimed at attracting long-term capital and encouraging fund management in India, certain anomalies may have, perhaps unwittingly, crept into the notification. If foreign investment into AIFs is construed as local money, then AIFs can be used to sidestep hurdles in foreign direct investment (FDI) regulations.

“The new measures promote the ‘manage in India’ proposition and attempt to minimise flight of talent from India. But while this would enable all sectors in India to access foreign capital without any restrictions under this route, it is important to consider its compatibility with the existing FDI regime,” said Punit Shah, partner at Dhruva Advisors, a tax advisory firm.

It is unclear whether the anomaly is a drafting error or a subtle move to reduce the significance of FDI restrictions. The particular sentence in the notification which has raised doubts reads thus: “The extent of foreign investment in the corpus of the investment vehicle will not be a factor to determine as to whether downstream investment of the investment vehicle concerned is foreign investment or not.”

Indeed, this can even go against some of the local institutions. For instance, an AIF set up by an Indian financial institution which has 74% foreign shareholding would be considered a foreign AIF. However, an AIF whose asset management company is controlled by an Indian professional holding 51% and the balance by 49% by a Wall Street bank would be considered a local AIF.

“To maximise the ease of doing business, the new schedule seems to be a complete code stating the complete policy on allowing foreign contribution into AIFs. The position to link downstream investments (by) funds based on control and ownership of the manager may have been to encourage India-focussed funds to adopt onshore fund structures. However, making the extent of foreign investment in the corpus of the fund as a non-factor may lead to unintended consequences,” said Richie Sancheti, head of investment funds at the law firm Nishith Desai Associates.

The notification also says that as ownership and control cannot be determined in LLPs (limited liability partnerships), a LLP shall not act as a sponsor or manager. Financial market professionals said this condition may also need a relook as several AIFs have structured the asset management entity as an LLP


This post first appeared in The Economic Times on Nov 25, 2015

Demand from the rich drives surge in local hedge funds


Mumbai: The number of local hedge funds, entities that until now were based mostly on foreign shores, is surging on demand from rich Indians seeking higher returns.

Supportive policies and increased demand from affluent individuals, who are willing to take higher risk for better returns, has led to a surge in assets managed by home-grown hedge funds this year, data from the Securities and Exchange Board of India shows. Those in the industry expect this to grow in the coming years as mature investors seek to move away from plain vanilla investment strategies.

Although hedge funds are similar to mutual or private equity funds as investments are pooled and professionally managed, many wealthy investors find hedge funds attractive because they have more flexible investment strategies and offer higher returns.

Hedge funds, which fall under category III of Alternative Investment Funds or AIFs, had investment commitments of Rs.3,515.51 crore at the end of September, more than double the commitments of Rs.1,356 crore as of September 2014.

Of this amount, domestic hedge funds had raised Rs.2,921.60 crore until September this year and invested Rs.2,302.72 crore, data shows. Last September, the funds raised and the amount invested were at Rs.1,068.35 crore and Rs.944.91 crore, respectively.

There were 27 hedge funds registered as of June, according to the latest data available.

Hedge funds are one of three AIF categories under Sebi rules. The other two include venture capital, private equity, infrastructure and real estate funds. Across all three categories, AIF commitments rose to Rs.27,496 crore as on September-end this year from Rs.16,736 crore in September 2014. Growth in the hedge fund category has been the steepest, albeit on a small base.

“Conventional investments have limited scope to invest in the equity space. For instance, the entire mutual fund industry rotates investment within a set of only 600 companies. So there is a limitation for them to maximize returns. In order to enhance returns, either the range of companies has to be increased for the scope of investment or the investment strategy has to be changed to long-short. And this can be done by hedge funds,” said Sanjay Sinha, founder of Citrus Advisors, an investment advisory firm.

The investment trend among affluent individuals has already shifted away from traditional investments like mutual funds, Sinha added.

“This will further shift towards AIFs, especially hedge funds,” said Sinha.

Under Sebi rules, the minimum investment in category III AIFs is Rs.1 crore, which makes this an investment option largely for high net worth individuals (HNIs).

According to a September report by Capgemini and RBC Wealth Management, India has the fastest growing population of HNIs, which means that there is no shortage of investors willing to put in that kind of money into hedge funds.

The Ambit Alpha Fund, run by Ambit Investment Advisors, is currently the largest home-grown hedge fund. The fund has grown from Rs.150 crore to Rs.900 crore in the last year, said Andrew Holland, chief executive of Ambit Investment Advisors Pvt Ltd. The fund now has 400 investors.

Ambit Alpha follows a long-short strategy for investment, which Holland says has helped them beat the markets where the benchmark BSE Sensex has fallen 6% this year.

“The best part about hedge funds is that one does not lose money whether the market goes up or down or even sideways. For instance, since March the equity market has mostly ended on a negative note on a monthly basis but our fund has not lost any money,” said Holland adding that investors are showing greater keenness to invest through such investment vehicles.

“Ambit Alpha Fund expects to grow its assets to at least Rs.2,000 crore over the next one year,” Holland said.

Some of the other firms that have launched hedge funds include IIFL Holdings Ltd, Motilal Oswal, Avendus Capital, DSP Blackrock, Karvy Capital and Edelweiss Capital among others.

Regulation is also helping this category grow. For instance, in November, the Reserve Bank of India allowed foreign investors and NRIs to invest in AIFs.

According to an internal study by Reliance Capital Asset Management, which manages Rs.1,000 crore through two category II AIFs, the change in foreign investment rules and the government’s decision to allow tax pass-through in category I and category II AIFs will help the industry grow.

“Both category II and category III AIFs are likely to grow faster than before in the coming year. The regulator has been a business catalyst so far for AIFs in India. The beginning has been good and institutional participation has started. We are planning to launch three AIF schemes in fiscal year 2017. One will be a mezzanine fund with a focus on real estate, second one will be a credit opportunities fund and the third one will be a category III fund,” said Shahzad Madon, head, portfolio management services and alternative assets, Reliance Portfolio Management.

The nascent hedge fund industry in India is now pitching for the tax pass-through status to be extended to category III AIFs or hedge funds, in line with the tax policy applicable to the other two categories of AIFs.

“Foreign investors will show a lot more interest to invest in category III AIFs if they are made tax pass-through. We have engaged with the authorities and the government to consider the changes in the taxation norms and once it happens, the hedge funds industry has the potential to double,” Holland said.

Sinha of Citrus Advisors, however, expects the hedge fund segment and the overall AIF industry to grow even if tax regulations are not eased by the government.

Globally, the alternative assets industry is growing at more than twice the rate of traditional investments, showed the Reliance Capital study mentioned above. In 2013, there was a total of $7.9 trillion worth of alternative assets in the world and this is expected to rise to between $13.6 trillion and $15.3 trillion in 2020, according to the study. The study sourced the data from Towers Watson and PwC.

“However, in India, most investors still believe more in long-only strategies, which means directly investing in the equity market for a longer term to benefit from market appreciation,” said Madon.


This post first appeared in Live Mint on Dec 25, 2015
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