According to him, it is more important the hedge funds industry to take a long term view of India and emerging markets. He feels that hedge funds are finding India a very important place to invest.
Lavaud however feels that currently international investors would still term India as a volatile and somewhat risky place to invest. At this stage, he believes that hedge funds are still looking at increasing positions in emerging markets. There is about $2-3 billion hedge fund money in India versus $1.5 trillion globally.
Excerpts of CNBC-TV18's exclusive interview with Pierre Lavaud:
What have hedge funds been doing in the last 15 odd days, as we have seen some kind of churn in emerging market flows? What have your fraternity of funds been doing?
Hedge funds, at this stage in India, are not different from all other investors. They are mostly long-only strategies and they have been trying to understand where the market is going and they are not necessarily clever than the others to identify where is the trend. So some of them have to reduce their positions, some of them have increased positions already because they believe that the correction is over.
Specific to the Indian market, what have you seen by way of a trend in the past two weeks starting from the correction globally into where we are standing now?
In terms of trends, I think the long term trends are much more important than the trend for the last two weeks. For the last two weeks, I would say its business as usual. I think still in international investors' mind and in hedge funds' minds, it is really much more important to consider the long term position of India in the global industry and in global emerging markets investment.
Hedge funds are starting to look at India as a very important place to invest. This is going to last for the next 20 years. So a correction of 20 per cent or even 50 per cent is probably more an entry point for them than anything else.
At this stage, the hedge funds industry is a $1.5 trillion industry and certainly less than 5 per cent is invested in India. But this percentage is certainly going to grow in the future.
What is the extent of leverage which some of these hedge funds, which invest in India, have at this point in time?
To my knowledge, the leverage used in India is very limited; the reason being that for most of the international investors, India is still considered as a risky place to invest, at least a volatile place and using leverage in a volatile place is not recommended. So my guess is that most of them are not leveraged.
Did you hear of any large scale redemption pressure coming in the last few weeks - both in the emerging market fund and India-specific ones?
I would not qualify that as large scale pressure. Again, I think some of the investors may have reduced their position slightly but they have not escaped the market at all, definitely not. Some of them have maintained their positions because at this stage, the hedge funds behave more or less like mutual funds, they are long term viewers, they are trying to find value in the market. As you know, value is something that is for the long term, so there is no real pressure to reduce positions.
Periodically when the market goes through slightly weak phases out here, we often see a lot of aggressive shorting happening in the Nifty futures. Do you think hedge funds are behind those kinds of short positions, which are fairly significant - we could even see maybe a billion dollars of shorts opening up in 4-5 sessions?
One of the use of futures is to hedge position and definitely going into indices and short in indices is one way to protect your position. This means that they are not necessarily reducing their long position but they are covering the long position using indices and shorting indices. It is part of the strategies that are used by hedge funds. But I think that this is relatively healthy and it makes much sense.
You have been speaking to a lot of hedge fund managers and foreign fund managers. What's the sense you get in terms of the biggest concern right now? Is it the US economy slowing down, is it the yen carry trade that we been talking about or something else?
There is a lot of talk about real estate and consideration of potential bubble in the real estate, globally speaking, this might be a concern and probably the worst concern. At the same time, talking about India, an interesting thing is that those economies like India, China or Russia seem to be less correlated and the trend is less correlated to United States. So we can imagine that even if there is a decent correction in the real estate in United States, that would not affect the Indian economy too much.
Globally, how are hedge fund managers feeling - are they running a bit scared after the recent fall or do you think they are comfortable with their emerging market investments?
The emerging market investment for hedge funds is still a small portion of their investments and they maybe a bit concerned on the very short-term period. But I think that in their view, they consider that emerging markets are going to be a more significant part of their portfolio allocation for the future. I think they should be more careful.
But on the emerging market point of view, I think that they are looking at increasing their position because at this stage, 5 per cent or 3 per cent of a global international portfolio is not representing the global economy. The global economy has moved from West to East 15 years ago, after the decline of Russia and the change of attitude of China, this has not been impacting the international portfolio. The way it should impact international portfolio is to increase the emerging market space. About 20 per cent of allocation in a diversified portfolio should be the right percentage to have in this region. From 5-25%, you can imagine that there is room to run.
In money terms how much money is running in India you think from all hedge funds?
It is difficult to assess but we can imagine that $2-3 billion is running directly from hedge funds today in India. So if you compare this to $1.5 trillion of the global hedge fund industry, it is a very small amount.
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