India: Public market-focussed alternative funds see record capital inflows at $1.3b

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In the first nine months of 2017, Category 3 Alternative Investment Funds (AIFs) have raised Rs8,521 crore (approximately $1.3 billion), which is more than double of what these funds managed to raise in the whole of 2016, according to data from markets regulator Securities and Exchange Board of India (Sebi).

In 2016, Category 3 Alternative Investment Funds managed to raise a total of Rs3,316 crore, data shows. Category 3 AIFs are hedge funds that invest in public markets.

The AIF regulations were notified by Sebi in 2012 and divides privately managed funds into three categories. Categories 1 and 2 catering to venture capital, private equity and debt and infrastructure funds.

Several firms have launched public markets focused AIFs this year, including Avendus which had raised over Rs2,000 crore for its long short equity fund and Reliance AIF Asset Management Co. Ltd, which is raising a Rs1,000 crore equity fund.

According to industry experts, Category 3 alternative investment funds are attracting interest because of the bull run in the Indian stock markets in the past three years, availability of talent, good track records in managing exotic trading strategies and the increased interest of wealthy individuals.

“The AIF Category 3 has been coming into vogue in the recent times for multiple reasons. One being that mutual funds were getting such large volumes of capital inflows, with some of them becoming Rs20,000 crore or Rs40,000 crore in size, that the ability to customize the offering became very limited. So, taking care of specific themes, specific ideas was becoming difficult in the mutual fund space,” said George Mitra, chief executive officer of Avendus Wealth Management.

Several firms launched such funds to take advantages of niche concepts or in-house trends, Mitra said.

In the last few years, many fund managers, who previously worked in the US with hedge funds or foreign portfolio investors investing into India, have returned to India, said Ashwyn Misra, partner at law firm Trilegal.

“These fund managers came back with a lot of technical capabilities, they could develop complex trading strategies. The market was also climbing, so there was clearly an opportunity and these managers had the track record and credentials to go to high net worth individuals (HNIs) to raise funds,” said Misra.

These fund managers have also introduced algorithmic trading and automated strategies to Category 3 AIFs, he said.

“There is considerable interest in putting money into these strategies, because they offer you less management fees so the outgo is less compared to actively managed funds,” added Misra.

The activity in Category 3 funds is also a factor of HNI wealth allocation moving to alternative assets that are financial in nature.

“In the past couple of years, the sheen has come off on asset classes such as real estate and gold. Yields have come down substantially. People were not putting too much money in fixed deposits and so they were looking for other avenues to park their money and public markets being the way are, attracted lot of capital,” said Mitra.

Mitra added that while the overall allocation towards alternative assets in HNI portfolios continues to be at just 7-7.5%, far lower than the global average of 20%, India is seeing a large amount of new wealth creation, which is increasing the quantum of capital coming into alternatives.

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This story was first published on Livemint