Hedge Fund Head Can't Compete With Stocks in Tough Indian Market

  • Andrew Holland says tax of a third of income drags on returns
  • Holland started one of country’s first onshore hedge funds

Andrew Holland.

Photographer: Abhijit Bhatlekar/Mint via Getty Images

Hedge funds in New York and London fretting about tough times have one consolation: at least they’re not in India.

There, a tax of about a third of income from investments -- versus no levy for mutual fund picks held for at least a year -- has kept assets managed by hedge funds in the country well below $1 billion and forced money managers to be creative. Take Andrew Holland, the man behind one of India’s first onshore hedge funds, who markets his long-short stock vehicle as an alternative to bonds.

“I can’t compete with equities with that tax,” Holland, who manages about 8 billion rupees ($124 million) for Avendus Capital Ltd., said in an interview in Mumbai. “It’s a big disadvantage,” he said of the levy. “We’d like to have a level playing field.”

Hedge funds in India got a relatively late start, with regulators allowing such investments for the first time in 2012. Unlike Asian financial hubs such as Singapore and Hong Kong, which have thriving hedge fund industries thanks to regulations that are more consistent with global peers, India has taken a tougher stance. The country’s tax and financial authorities still see hedge funds as “not investing for the long term,” says Holland, who’s lived in India for two decades.

“But actually you’re providing liquidity for the market,” Holland said. “And also you are investing, because it’s not just pure speculation.”

Hedging Risk

D.S. Malik, a finance ministry spokesman, said he wouldn’t like to comment on the matter, and Meenakshi Goswami, official spokesperson at Central Board of Direct Taxes, didn’t answer calls to her office and mobile phones.

While India’s stock market is approaching $2 trillion in market value, its domestic hedge funds oversaw just $603 million as of May, according to Eurekahedge Pte. Contrast that with the country’s mutual funds, which manage the equivalent of $284 billion, according to data compiled by Bloomberg. Worldwide, hedge funds manage more than $3 trillion in assets.

Holland designed his fund, which hedges at least 30 percent of its long positions, to have risk levels comparable to Indian debt. The Avendus Absolute Return Fund, which started in March, aims to make a gross return of 15 percent to 20 percent no matter how the stock market does. That works out at 8 percent to 11 percent after tax and fees, he says. India’s two-year sovereign debt yields about 6.4 percent, and the nation’s benchmark stock market index posted a total annualized return of 15 percent over the past five years.

“We’ve said we want your money from your debt portion, not your equity portion, because you’re getting similar-type risk,” Holland says. “What you’re getting is bond-like risk but equity-type returns.”

Fewer Shorts

Holland moved to India in 1997 to become chief administrative officer and head of research for the country at Merrill Lynch, after working for banks including Barclays Plc and Credit Suisse Group AG. In 2006, he set up an internal India hedge fund for Merrill Lynch, which he ran until 2008, when he moved to Ambit Investment Advisers to do the same. In June 2013, he started the Ambit Alpha Fund after India allowed hedge funds to oversee other people’s money.

Holland points to shorting as one example of how the market differs in India. He says he does all his short investments through the futures market, because borrowing stock is too difficult and expensive, and he never tries to make money by picking individual shares that he expects to fall. His fund only invests in large-cap shares.

“India is an emerging market,” he said. “In the West, it’s quite easy to say, this company is terrible and it’ll go down to here. Most times it will. In India it doesn’t work that way. Shorts kill you.”

Holland says his investors include wealthy individuals, family offices and corporate treasuries. The institutional market for hedge fund investments is still small in India, he says. He says he’s been lobbying the government to try to get the tax laws changed, and if that succeeds, Indian hedge funds could manage as much as $12 billion within five years.

“If we had a level playing field, this industry would be enormous,” he said.

— With assistance by Shruti Srivastava, and Klaus Wille

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