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Journalism of Courage
While nobody, but nobody, can ever put a firm finger on the vagaries of the market, the past six months have seen another suspect8217;s name being bandied about8212;hedge funds.
Case in point, among a fair number of other instances, being the recent 101-point Sensex slip-n-slide. And though their sole culpability is difficult to establish, the fact remains that their participation in Indian capital markets is very much on the rise.
Says Pradeep Shah, chairman, IndAsia Fund Advisors, 8220;Hedge funds around the world focus on one thing8212;absolute returns. With the opening up of derivatives trading, it is inevitable that they should come in here.8221;
And they are so much here that the Securities and Exchange Board of India Sebi last month asked foreign institutional investors FIIs operating in India to disclose, on a fortnightly basis, details of participatory notes PNs issued by them to overseas investors like hedge funds.
But who indeed are these faceless entities? Just how do they operate, and why8217;s the market regulator sitting up and taking extra notice? Hedge funds are purely speculative 8216;hot money8217; funds that use strategies other than investing long.
Among the methods used are short selling, using arbitrage, trading derivatives, leveraging or borrowing and investing in out-of-favour or unrecognised or undervalued securities, as well as currencies. In fact, the name 8216;hedge8217; fund itself is a misnomer, because these funds do not actually hedge against risk! The returns can be high, but so can be losses.
Hedge funds like the one run by George Soros, have been blamed for disruptions like the East Asian crisis. Their pursuit of the highest possible returns sees them indulge in high-risk strategies like arbitrage or investing in volatile markets. And very rarely do they buy and hold. They could, for instance, go long on an Infosys ADR in the US, while dispensing with the stock in India, and should their gamble click, they make double money.
Hi-tech financial infrastructure helps them move in and vamoose out of markets and countries without much ado. Their 8216;hot8217; money could electronically be one day in Brazil and next, in India. Extreme volatility then, in most cases, is a given. Hedge funds strike when the market is at a low, going on a buying spree, building along with it, the hopes of retail investors.
As sudden as their buying, is their exit, when they8217;ve booked profits. The market, needless to say, takes a sudden and huge dip. Critics have often accused hedge funds of being fickle-minded gambling funds that tend to use the bourses or country after country as casinos.
Says Moulik Sharedalal, director, Kaji 038; Moulik Securities, 8220;Once you open up the market, one can8217;t really decide who is going to enter it. However, to the extent that short-term money is purely an interest rate arbitrage, it would create the undesirable situation of having an ongoing overhang of supply on our equity markets.8221;
Adds Dharmesh Mehta, head, broking, Enam Securities, 8220;Sebi8217;s decision to monitor PNs issued by overseas investors is being taken as a sign of near-legal sanctity, and one can see international investment being given a big boost.8221;
Indian as well as foreign brokerages are tight-lipped about the volatility hedge funds create and that8217;s because they operate through PNs issued by these very same brokerages.
Says an official at a prominent Mumbai brokerage, 8220;In a good market, hedge funds are as good as they can get. But it is in times of downturn that they can cause much damage. A single transaction by them can increase volatility much more then, say, a similar one by a domestic institution.8221;
While net FII investment has already breached the Rs 17,000-crore mark in calendar year 2003 it stood at 17,390 cr on September 18, market analysts advise caution. According to them, a significant part of this could be due to momentum investors. What is going around in the market could by all means be arbitrage money. The need, they say, is of regulations to ensure that the facility of hedging does not translate into pure arbitrage. Market players also say that the problem is the absence of a counter-balance to these funds. There is, as yet, no robust domestic financial institution, which can move in to stabilise the market. Considering the fact that hedge funds have been indicted in disruptions like the East Asian meltdown, there seems to be a valid case to regulate them.
Which is where Sebi comes into the picture. Though Sebi chairman G.N. Bajpai have claimed that it might seek the help of its counterparts like Securities and Exchange Commission SEC of USA to track these funds, nothing much has been revealed about any regulations. This is despite the Sebi chairman hinting at allowing hedge funds to operate directly in the Indian market very soon.
