SEBI may allow hedge funds direct entry into stock markets

The Securities and Exchange Board of India (SEBI) is considering the possibility of allowing select hedge funds to enter the stock market directly.

Allowing hedge funds to invest in the stock markets directly "is something we are working on at this point of time," chairman M Damodaran told a PHDCCI seminar.

He said many of these funds have strong management, better track record and sound investment pattern and that he himself was for facilitating the entry of those funds. Where comfort level is higher, he said hedge funds should be allowed direct entry rather than through participatory notes (PNs).

At present, these funds, which are not registered foreign institutional investors, invest in India through PNs, which are offshore derivative instruments.

Some of them also have long lock-in periods of three years and this may limit large overnight redemptions, he pointed out. He, however, advised proper checking of their profile and investment pattern before allowing entry.

The move comes amidst reports that India-focused hedge funds are having a stirring business and have even beaten their counterparts in other markets in terms of performance.

And, with the BSE Sensex notching up a 40 per cent gain since June this year, riding on bellwether IT stocks, India-focused hedge funds are reporting about 8-10 per cent monthly returns

According to global hedge fund tracking firm Eureka Hedge, two India-focused hedge funds – India Capital Fund and Atyant Capital India Fund – are among the top five best performing Asian hedge funds in September 2006.

India Capital Fund was the second best performing hedge fund in Asia during September, giving a return of 9.20 per cent while top performer Prodigal Absolute Return Fund, another Asian hedge fund, gave returns of 11.25 per cent.

And, on the flip side, US regulators are examining the $1.3-trillion hedge fund industry to make sure investors are protected and systemic risks they might pose are known, reports quoting treasury secretary Henry Paulson said.

The Treasury department is leading a task force that's examining the impact of hedge funds on financial markets. The inquiry also involves the Securities and Exchange Commission, the Federal Reserve and the Commodity Futures Trading Commission.