Bungle in the jungle

It’s been roughly a year since Citigroup bought Old Lane, LP, a hedge fund firm co-founded by Vikram Pandit before he became the Citigroup CEO. Last July, Old Lane registered as a foreign institutional investor (FII) to be able to trade in Indian equities. However, the past 12 months haven’t been easy for Old Lane, which has been plagued by poor returns. Last fortnight, Citi took a decision to ‘restructure’ Old Lane.

As the Citi-Old Lane example reveals, along with the big global banks, hedge funds too have been at the epicentre of the global financial markets crisis that was triggered by the subprime problems in the US. If FII inflows have slowed down into India, it could also be because of the reversal in fortunes of hedge funds. At one time it was estimated that at least a fifth of the FII inflows into India were from hedge funds, mostly through the participatory note (P-note) route. When P-notes were restricted last October, many of these foreign investors chose to enter directly, by registering as FIIs with the Securities & Exchange Board of India.

But the gut-wrenching volatility of the past year has caught up with hedge funds. According to the Lipper TASS Asset Flows Report for the first quarter ended March 2008, the total assets managed by hedge funds fell from $1.79 trillion in December 2007 to $1.75 trillion in March 2008. The pace of inflows into the funds slowed down for the fourth consecutive quarter.

Apart from the slowdown in inflows, the performance of funds in the first quarter has been the worst since 1998. In the quarter ended March 2008, the Credit Suisse Hedge Fund Index posted a negative 2.01 per cent return, the worst since the third quarter of 1998, when the index fell by 8.87 per cent.

The report attributes these trends to the continuing illiquidity in the credit market, rising mortgage delinquencies, lower corporate earning estimates and stagflation. “Under these circumstances, investor risk appetite was sharply reduced and the first quarter was notable for the scale and depth of de-leveraging by banks as well as hedge fund managers,” says the report.

The Indian market has already felt the tremors as FIIs have withdrawn $5.42 billion from it since the beginning of the year. U.R. Bhatt, Managing Director, Dalton Capital Advisors (India), feels that the lack of appetite among foreign investors will continue for some more time till there is some stability in the global markets.

“Investment banks continue to report losses. Oil prices pose another big threat. In this scenario, fund managers are more concerned about saving their jobs. So, nobody really wants to bet on emerging markets like India, as of now,” says Bhatt.

—Rachna Monga