Over recent years, as growth rates in developed economies have stagnated, emerging markets have attracted great interest among investors as such countries benefit from global capital flows. A previous blog explored how hedge funds with a focus on emerging markets saw a divergence in performance over recent years, with Asia particularly showing outperformance among its peers in 2014. Hedge funds with a focus on India saw a good year of performance in 2014, and in this blog we examine how these funds have fared over the past year and how this performance might play out in the longer term.
As shown in the table below, three India-focused hedge funds appear in the top performing league table in 2014, indicative of the ability of fund managers focusing on India to successfully capture the activity in the region and produce outsized returns to investors. Preqin’s Hedge Fund Analyst tracks 234 unique hedge fund vehicles with a focus on India, detailing information such as fund strategy, investment methods and fund performance metrics among others. Passage to India Opportunity Fund (Cayman) – A Shares was the top-performing hedge fund globally in 2014 by net return. The fund is managed by Arcstone Capital and aims to produce long-term investment gains in excess of the Indian indices by investing primarily in smaller, underfollowed and under-researched listed Indian companies.
The outperformance of India-focused hedge funds is mainly attributed to the election of Prime Minister Narendra Modi in May 2014. The new Indian Government was elected on a platform of economic reforms, with promises of enacting pro-business policies and increasing India’s exposure to foreign investments. This revived confidence provided a boost to the domestic equity market and proved to be a boon for hedge funds investing in the country, which typically employ value-oriented or long-biased equity strategies.
Given the recent stellar performance, a central question in the minds of investors is whether the outperformance of India-focused hedge funds will continue into 2015. The results so far are encouraging, as over Q1 2015, India-focused hedge funds returned 3.83% for the quarter, surpassing the Preqin All-Strategies Hedge Fund benchmark of 2.88% for the same period. This is partly attributed to a recent reduction in interest rates by the Reserve Bank of India, providing additional support to domestic equities. Nevertheless, the future performance of India-focused funds depends crucially on the ability of PM Modi’s Government to attract and retain foreign investments in order to sustain the longer term returns of its equity market.
With the long-term implications of Modi’s premiership yet to be seen and financial markets in India showing greater opportunities for the investment environment to develop, it will be interesting to see how hedge fund managers targeting Indian markets will fare over the coming months and whether there will be more India-focused hedge funds appearing in the league tables this year.