Even as the rupee hit its all-time low of R55.45 against the US dollar on Tuesday and analysts predicted a further depreciation, there are those who haven?t given up on the long-term future of the Indian currency.

Stratton Street Capital, a London-based hedge fund that manages assets worth $1.2 billion, has introduced a portfolio with a rupee hedge for its Wealthy Nations Bond Fund. Launched late last year, this class of products fully hedges the US dollar bond portfolio, under its umbrella of Wealthy Nations Bond Fund (WNBF), through the rupee, using the non-deliverable forwards(NDFs).

According to the hedge fund, at current interest rates, the strategy has given investors an effective yield of 16.2% as of April 2012. Despite the current weakness in the rupee, the hedge fund does not see interest in this product falling and believes this is the right time to enter the trading cycle.

SSC points out that for the long-term investment strategy applied to their bond funds, it expect the rupee to emerge as one of the stronger currencies in the world market as it believes that India has excellent long-term economic potential.

Says Andrew Main, managing partner, SSC: ?We think that India is a very strong long-term story. What we have, therefore, looked to do is try to give our international investor a way of investing in one of our funds, which allows them to get exposure to the performance of the Indian rupee. This is the process that we have successfully done since 2007, with our renminbi bond fund.?

Explaining how the renminbi bond fund works, Andrew says that, effectively, SSC takes a call on the offshore dollar debt issued by borrowers in Asia. These are then hedged back into renminbi through the NDF market, the offshore market for tracking the performance of the Chinese renminbi against the US dollar. ? By launching the USD-INR class on wealthy nations bond fund, we are trying to replicate this approach, ? Main explained.

Collectively, apart from the basic US dollar denominated bond portfolio, which is expected to give about a 6-7% return per annum, the rupee hedge, which works out as a carry trade due to the interest rate differential between US and India, is expected to yield an additional 7-8% .Over and above these returns, the hedge fund has priced in an appreciation in rupee value that would enhance returns. The rupee class fund differs from the renminbi bond fund in one aspect; unlike the latter, it does not offer the possibility of investing in the local bonds. This, SSC says, is the result of its ?conservative approach? with respect to the Indian bond market.

?We are relatively conservative in our approach. Within the funds that we operate, we offer high rate of liquidity and dealings take place on a daily or weekly basis. Due to the current restriction on the foreign investment allowed in the bond market of India, there is too much of a liquidity mismatch, a risk that we are not willing to take,? added Main.

Even if the renminbi bond fund has an option to offer the direct exposure to the domestic bond market, till date, Stratton has only exposure to offshore dollar funds, citing the volatility and lower yields of the offshore tenminbi bond market also known as ‘Dim Sum’ market.

For the basic bond portfolio, WNBF, global investment grade bonds are selected on ? value? grounds after applying Stratton?s net foreign asset (NFA) analysis. Government and corporate bonds from a group of 30-35 countries with a strong balance sheet out of the 128 countries tracked is the universe available for the selection.

The next stage is to hedge 100% of the assets attributable to the rupee classes into rupee using NDFs. Typically, the managers hedge for one month as they consider that to be the most effective way of achieving the hedge with low volatility. Further, as the rupee is not a convertible currency, the profit or loss is settled in US dollars at the end of the period. Also, within the NDF, the interest rate differential between the USD and INR is captured over the period of the hedge.

There are two classes of the INR-hedged bond fund: One with a lower fee is designed for institutional investors with a minimum investment of $1 million. The second class, aimed at other investors, with a minimum investment of $10,000, charges a higher fee.