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India seen more fertile for hedge funds
By agencies
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Thursday, 11 August 2005, 19:30 IST
LONDON: Tempted by strong economic growth and the promise of high returns, hedge funds are flocking to equity markets in both China and India, but analysts say India is likely to be a better bet for the foreseeable future.
India is favored because equity markets there are becoming easier for hedge funds to trade with the growth in derivatives such as futures, which allow short selling. Things are changing faster in India than in China, analysts said.
"Indian markets are gaining depth by the day, more instruments, more shorting possibilities and single stock futures," said Christoph Avenarius, a senior hedge fund analyst at Credit Suisse Alternative Investments in Zurich.
"It's difficult to make money in Chinese equity markets ... Some people have realized this."
The exact number of funds and their returns are difficult to pinpoint because India and China equity hedge funds normally come under the general category of emerging markets.
A survey by trade publication AsiaHedge found 13 new hedge funds focusing on Asia excluding Japan- mainly in China and India- were launched in the first six months of this year.
"A year ago there were only a few hedge funds looking at China and India, now there are 10s of them," said John Godden, European managing director of HFR Asset Management. "Growth of hedge funds investing in India has probably been faster."
Hedge funds along with other investors pushed India's benchmark 30-share BSE stock index to record highs above 7,800 last week. On Wednesday it was trading at around 7,650, up about 25 percent since April.
"The market has had a good run and valuations in India are quite expensive ... But we're seeing quite a few hedge funds start up in India primarily in the equity space," said Gavin Rankin, head of investment analysis at Citigroup Private Bank.
Chinese benchmark, the Shanghai composite index, has fallen to around 1,150 from above 1,700 in April 2004, when investors including hedge funds pared back their exposure to the market on expectations of slower economic growth in China.
Hedge funds are returning, albeit slowly, to Chinese equities, but they are mostly restricted to buying and holding shares and only selling those they own. They cannot use tools like derivatives to control investment risks.
Analysts say others have chosen India in the belief that, for now, China has little or no intention of liberalizing its financial markets or allowing widespread use of derivatives, which it thinks could destabilize the economy.