Incidentally, Amaranth's investors include pension funds, endowments and large financial firms like banks, insurance companies and brokerage firms. Market analysts said the massive loss experienced by Amaranth triggered panic selling in the Indian equity markets as many hedge funds resorted to profit-booking to meet possible large-scale redemptions. As such, according to a section of market participants, hedge funds have always been known as short-term players who are here only to hedge their global portfolio.
"In stock market jargon, we have two kinds of funds -- short funds and long funds. Hedge funds, as the name suggests, are in India only to hedge their portfolios and fall in the short funds category. Unlike foreign institutional investors (FIIs), hedge funds may not always be concerned with the corporate developments in the long run and so are, in a way, dangerous.
Of late, they have earned a notorious name as large-scale selling has been witnessed from hedge funds to offset their other investment losses. There has been no other trigger for their selling activity. Amaranth's was a classic example," said a chairman and MD of one of India's leading domestic brokerages.
In fact, Wikipedia defines hedge funds as lightly regulated private investment funds. "In contrast to regular investment funds, which are usually limited to only being able to 'go long' (buy) instruments such as bonds, equities or money markets, hedge funds also have the ability to 'short' (sell) instruments, which they believe will fall in price. In this way, hedge funds are able to create more complex investment structures which can, for example, profit in times of market volatility, or even in a falling market.
Hedge funds are normally open to institutional or otherwise accredited investors." According to predictions, hedge fund assets would grow at an annualised rate of 15% between 2006 and 2008
According to Chicago-based Hedge Fund Research Inc (HFRI), investors poured almost $ 340 billion into hedge funds globally during the past five years, increasing the industry's assets to $ 1.3 trillion.
Further, according to Eurekahedge, a Singapore-based research company, globally, 1,050 funds invest exclusively in emerging markets and manage about $150 billion of assets. Of the almost 900 hedge funds tracked by Eurekahedge, almost 60% invest only in stocks, a type of fund known as long/short equities. Research conducted by Massachusetts-based TowerGroup predicts that hedge fund assets will grow at an annual rate of 15% between 2006 and 2008 while the actual number of hedge funds is likely to remain relatively flat.
Meanwhile, India and other emerging markets, which have seen an impressive bull run in the recent past, have been looked upon as popular destinations by hedge fund managers. No other market has been able to outperform the emerging market pack in the past. Among 13 various indices managed by HFRI, the Emerging Markets (Total) index has been the best performer and has given returns of more than 12% in the last one year.
No other index has been able to deliver double digit returns in the same period. This impressive rate of return, according to experts, has brought in more and more hedge funds to India, thereby providing more liquidity and depth to the markets. However, stability does not always come with a hedge fund investment.
And while one may argue that hedge funds have earned a notorious name for themselves by not staying invested for a longer duration, it is a fact that hedge funds have been able to support the bourses by pumping in a huge amount of liquidity. As far as the debate over legalities and the identity of hedge fund investors goes, it is a never-ending one. So long as the markets get deeper and the benchmark indices head north, no one would complain.
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