Institutional Investor's Alpha Magazine - October 2007 - (Page 62)

Investing in India Fund manager Ron Shah (near right) of Jina Ventures says long investing remains the best bet for investors in India; “For hedge funds targeting India, the potential for growth is tremendous,” says Manish Thakur co-founder and CEO of Hudson Fairfax Group. approach to public markets, what we term ‘liquid private equity,’ allows investors a ﬂexibility that traditional private equity investing does not.” Monsoon focuses on small and midsize Indian stocks with market caps ranging from $50 million to $1 billion. In 2005, roughly a year and a half before the broader market noticed, Monsoon decided to take advantage of the virtual nonexistence of research coverage of India’s real estate developers. It discovered such investment opportunities as New Delhi–based Anant Raj Industries, a developer of hotel and ofﬁce complexes. Monsoon’s 3.5 percent holding in Anant Raj, whose notable investors now include such names as George Soros’ Quantum Fund, Lehman Brothers Asia and ABN Amro Bank, is worth roughly $34 million — a 90 percent return on its investment. Nandita Agarwal Parker, founder of Karma Capital Management, has taken a similar investment approach. She says the ability to discover unknown businesses with strong potential is the key to success — something she believes can only be achieved by establishing a physical presence in the country. “We need to be in India to best capitalize on the anomalies of the Indian market,” says Agarwal Parker, whose Old Greenwich, Connecticut–based ﬁrm runs its research and marketing operations out of New Delhi. Oddly enough, one of the biggest proponents for the growth of India’s hedge fund industry could prove to be the very government responsible for the archaic rules that have impeded fund managers’ activities so far. Aware of hedge funds’ dependence on less traditional investment vehicles, such as participatory notes, and hoping to increase transparency, India recently announced some regulatory changes that will create a more hedge fund–friendly 62 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2007 atmosphere. In September the country began requiring all new funds to register with SEBI, eliminating the need for hedge funds to rely on participatory notes and allowing them to invest directly. Additionally, SEBI has said it plans to allow stock borrowing and short-selling and to permit domestic mutual funds — on a case-by-case basis — to offer investors access to hedge funds. Although introducing the ability to short stocks and hedge in India’s capital markets will be a major draw for hedge fund managers and investors alike, GFIA founder Peter Douglas believes restrictions that prohibit foreigners from investing in certain sectors, such as defense and nuclear energy, and place limits on how much stock they can own in any one company should also be liberalized. “The current system forces skill-based managers to invest using participatory notes, which one hedge fund manager has called ‘the Indian people’s heartfelt gift to the world’s investment banks,’” Douglas says. “Regulators impose unnecessary frictional costs on trading in India, which reduces liquidity and therefore capital available to Indian businesses. And those frictional costs are a risk-free source of proﬁt for investment banks.” But given India’s vast potential for growth and relatively clear playing ﬁeld — and the generous returns some early hedge fund entrants have managed to generate — it is likely more such funds, both foreign and domestic, will assume the risks and difﬁculties of setting up shop and investing in India. “India’s growth is multifaceted, with many tailwinds driving the country’s growth story,” says Hudson Fairfax’s Thakur. “The combination of stable, aggressive and longterm-oriented family owners with competent and highquality professional managers is potent and has finally caught the attention of global fund managers.” Photos by Tom Tavee (left) and Chad Batka (right) for Alpha

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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