FE Editorial : Hedging the hedge

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: Does the large-scale redemption by leveraged hedge funds from Indian stock markets mean that equities are now in the hands of more ‘stable’ investors and promoters with a ‘long-term’ view? Non-institutional investors increased their stake from 16.65% in June to 17.02% in October, which shored up the Sensex and in the past few weeks, the index has been range-bound. So, can one argue that with ‘subsiding’ volatility, much of the market movements will depend on macroeconomic factors and corporate earnings in the next few quarters? At the time of the market boom last year, foreign institutional investors (FIIs) pumped in a record $17.2 billion, but after the market crash, they have pulled out 77% of this investment from Indian equities. Sectors like financial services, steel, metal products, computer hardware and sugar saw a significant outflow of foreign funds. During the bull run, hedge funds had an aggressively managed portfolio of investments, which used advanced investment strategies such as leverage, long, short and derivative positions in the domestic market for higher returns. But after the market crash, the funds reported 46% loss on returns, the highest in an emerging economy. However, this loss was less than the 55% fall in the benchmark Sensex. Even the sharp depreciation of the rupee against the dollar has affected hedge funds in India as they were getting less dollars at the time of conversion, forcing them to sell more of their India assets.