PNs’ value rises as hedge funds cash in on weak $

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Mumbai: Overseas participatory note (PN) investments, especially operated by hedge funds, have once again become active in the last two months. This is on the back of a weakening dollar against major currencies in the world. This could be corroborated by the fact that the value of PNs, as a proportion of the total asset under management (AUM) of foreign institutional investors (FII), has shot up in October from what was recorded until August. Not surprisingly, the dollar-carry trade, with hedge funds borrowing at near-zero dollar interest rates and deploying the money in emerging market equities—also gathered pace in the past two months. During this period, the notional value of PNs has increased by nearly 13% from Rs 1.10 lakh crore to Rs 1.24 lakh crore. Compared to this, the total value of AUM of FII has increased by just over 6%.

Currently, hedge funds are doing dollar-carry trade by borrowing cheap in dollar at nearly 0% interest and deploying these funds in higher yielding asset classes like commodities and equities. However according to market participants, the trend of higher trading activity by hedge funds will lead to increase volatility in the domestic bourses. “Hedge funds are really getting active on the back of easy liquidity at nearly 0% interest,” said Vipul Dalal, director (business development) at UK-headquartered Elara Capital.

“In the last two months, hedge funds have allocated $5 billion for investment in Indian equity market—a portion of which is getting invested in the Indian market,” said VVLN Sastry, country head, Firstcall India Equity Advisors, a firm engaged in advising investment strategy for over 30 FIIs in India. He said the participation from PN investors have increased because of the secular uptrend in the Indian market and the resilience shown by the domestic economy in the last few months.

“The rise in the PN volume is also on account of the improvement in the positions of major PN issuing FIIs whose parental banks have reported better quarterly results and have increased their allocations to emerging market equities post Lehman Brothers crisis,” said Dalal.