Hedge funds lose $170 billion in third quarter

The hede fund industry lost nearly a tenth of its size as it was caught between biggest outflows since 2005 and worst performance in 10 years. Global hedge fund assets shrunk 8.8% to $1.63 trillion on September 30, 2008, from $1.8 trillion on June 30. The size of the industry is further expected to shrink to $1 trillion.

Tough times for the hedge fund industry began with the unravelling of the short financials and long commodities trade, where in the hedge funds sold US financial stocks and bought commodities.Changes in margin requirements and other trading rules by US regulators triggered the unwinding of this trade which saw crude prices drop from $ 148 levels to below $100 in a flash causing serious dent in assets of many hedge funds.

The industry had received inflows in the first two quarters of the year, though the inflows have been falling gradually over the previous four quarters.In the quarter ending June, $4.03 billion came into hedge funds.However the reversal in the third quarter has taken the overall flows for the year into negative for the first time in three years. At nearly $12 billion, the outflows in 2008 is already threefold larger than the last negative reading in December 2005, with three months to spare.

Swaps the way to go!!

Equity swaps seems to be the preffered route for those foreign investors, who prefer to stay away from the regulatory glare, tapping other routes for investment in the local market. In the past few months, these investors, including global hedge funds, have been increasingly using the equity swap — an unregulated over-the-counter (OTC) derivative contract — to take exposure to the Indian market.

Hedge funds have been using this route, especially to gain exposure to India’s futures and options market, where trading through participatory notes have been completely banned since last October.An equity swap is an arrangement where a series of future cash flows are made by two counterparties to each other. The pre-determined set of payments, which is based on a notional principal amount, may be determined by returns on stocks or indices or a fixed or floating rate.

UTI Ventures exits Excelsoft, earns 50 times its investment

In one of the biggest exits by a private equity firm in India, UTI Ventures has made 50 times its investment by selling its 35.5% stake in e-learning firm Excelsoft Technologies for Rs 125 crore to hedge fund DE Shaw.UTI Ventures had invested Rs 2.5 crore in 2001 in the Mysore-based firm. Other firms reportedly in the fray for the UTI Ventures stake were Sequoia Capital, Fidelity Ventures, Cisco Ventures, Silicon Valley Bank and Softbank.

The deal marks DE Shaw’s first investment in the education space, an area which has attracted a lot of investor interest. E-learning is the fastest growing segment of the $2.3-trillion global education market and is growing at a CAGR of 40%.

Excelsoft, set up in 2000, does consulting, product design & engineering, custom software development and provides content development services in the area of e-learning. It caters to corporations, universities, schools, publishers, e-learning portals and governments across the world. Its clients include Pearson, Wolter Kluwer, Thomson Learning, Harvard Press and Oxford.

The DE Shaw group is a global investment and technology development firm with more than 1,300 employees and about $35 billion in aggregate investment capital as of January 1, 2008. Some of DE Shaw’s investments in India include DLF SEZ, Soham Renewable Energy and Crest Communications, among others.

Read more in The Economic Times article.

Citigroup's hedge fund unit eyes KVK Energy

Citigroup Inc.’s hedge fund unit Old Lane LP plans toinvest Rs 1.06 billion ($26 million) in India’s KVK Energy & Infrastructure Pvt., as the world’s second-fastest pace of economic growth lures investors.

Old Lane, bought this year by Citigroup, may acquire 26 per cent of KVK Energy, which builds power projects, company secretary Ram Mohan said in a telephone interview from Hyderabad, where KVK Energy is based. He didn’t give a timeframe.

An Indian panel this week will consider proposals from KVK Energy and 17 other companies seeking to invest in India or sell stakes to overseas buyers, according to information posted by the industrial policy department of the government.

Read more in The Business Standard article.

Avenue Capital to pick 15% in Morepen for Rs 80 crore

US-based Avenue Capital, a hedge fund that focuses on distressed and undervalued debt and equity opportunities, is in an advanced stage of negotiations to pick up an equity stake in Delhi-based loss-making pharma company Morepen Laboratories. Sources indicated that Avenue Capital could pick up 15% stake for around Rs 80 crore, and the deal which is expected to be completed by the middle of this month.

The fund is offering Rs 20 per share of Morepen Labs, which works out to a 28% premium to Friday’s market price of Rs 15.6. However, it is about 40% higher than the share price when negotiations between the two began.

Sources close to the deal also said Avenue has the option to subscribe 5% more of the equity by way of warrants in the future. For this, they will have to make a down payment of 10% of the agreed price upfront, while the remaining will be paid up in 18-months. This will trigger off the mandatory requirement of an open offer.

Currently, Morepen’s equity base is of about 21.1 crore shares. If Avenue’s stake goes up to 20%, the number of shares will go up to 37.06 crore shares including the warrants made to promoters and investors. The company has issued 75 lakh shares or 3.43% to banks under a debt restructuring settlement at the same rate. This will result in a promoter holding of about 46%.

Read more in The Economic Times article.

Baer plans $250 mn hedge fund

Private equity player Baer Capital Partners plans to launch $ 250 million India-dedicated hedge fund by the year-end. Baer Capital is the first hedge fund to announce its India plans, after the recent proposal by the Securities and Exchange Board of India allowing direct entry of hedge funds.The fund is likely to be called Beacon India Growth Fund.

Baer Capital will have to register as a foreign institutional investor (FII).The fund will be investing in public (or listed) companies. It will be a long biased hedge fund using futures/derivatives to hedge itself against market decline. It will have more flexibility to stay in cash or take concentrated position and will be focused mainly on the mid-cap stocks across sectors.

The shareholders of Baer Capital Partners are the Fleming Family (10 per cent), Dubai Holding (15 per cent), founders Michael Baer, Alok Sama and Brij Raj Singh (together 50 per cent) and the balance by Shuaa Capital and CQS Management, London-based leading hedge fund company.

Read more in The Business Standard article.

Berggruen Holdings lines up $300 m investment for India over next three years

New York-based fund, Berggruen Holdings, which manages proprietary capital worth over $1.5 billion, plans to invest over $300 million in India over the next three years in hospitality, real estate, education, car rental, construction equipment leasing and logistics businesses.

Of this, the bulk—around $200 million—would go into real estate projects spread across commercial, residential and retail spaces, while the remaining would be for setting up 40 budget hotels across the country. The fund also made a foray into equipment rental business by picking up around 90% stake in a Mumbai-based company for around $10 million. It also invested a similar amount for its car rental business.

Berggruen Holdings is a private company, with interests in private equity, stocks and bonds, hedge funds, art and real estate, which manages funds of the Berggruen family,.

Read more in The Economic Times article.

Vulture funds' overtures to SMEs

Can the vulture nurture as well? Perhaps, it can. Distress asset funds (pejoratively called vulture funds) and distress asset arms of global hedge funds operating in India are increasingly beginning to focus on small and medium enterprises, a segment which is the preserve of commercial banks.

These funds are also looking at investing in third generation entrepreneurs, where a split in the family usually means that individual members have to raise capital for their expansion.

Over the past six months, funds specialising in distress assets like ADM, Clearwater, Citadel, Goldman Sachs Special Situations and DE Shaw have invested in such companies, say industry sources. For example, Spinnaker has invested in Spice Telecom and Clearwater in Sanghi Movers and earlier Diamond Cables.

Read more in The Economic Times article.

Participatory Notes grows 70% in 1 year

According to government estimates, the value of participatory notes (PNs) in the stock market grew 70 per cent in just one year between January 2006 and January 2007, accounting for over one-third of total foreign portfolio investments in the Indian stock markets.

PNs are offshore derivative instruments issued by foreign institutional investors (FIIs) to unidentified overseas investors who are not eligible to invest directly in Indian stocks.

The RBI has criticised PNs, which do not require fund source disclosures, terming them a conduit for money laundering by Indian companies and for hedge funds, which are not permitted to trade on the Indian bourses.

Hedge funds, in particular, which are known for their quick entry into and exit from stock markets, were blamed for the high volatility of Indian stock prices ever since the 2,000-point crash of the benchmark Sensex in May 2006.

But contrary to conventional wisdom, the share of hedge funds in total PN investments in the Indian stock markets could be as little as 8-9 per cent.Earlier estimates put hedge funds’ share at 70-80 per cent of total PN investments, which formed the basis of demands for a ban on this instrument.

Read more in The Business Standard article.