Avendus Capital stirs up Indian hedge fund play with first $1bn AUM

MUMBAI: Diversified financial services firm Avendus Capital has emerged as the first India-bred hedge fund house with more than $1 billion in assets under management (AUM). Avendus co-founder and chief executive Ranu Vohra said he is betting on assets swelling to as much as $10 billion in the next six years as the nascent domestic hedge fund industry stirs up.

In just under a year, asset management arm Avendus Alternate Strategies now has $1.3 billion, after it raised the largest onshore hedge fund and acquired the India focused offshore manager Ocean Dial. "We have raised Rs 4,000 crore ($650 million) in two long-short schemes, accounting for nearly one-fifth of all the onshore hedge fund assets," Vohra, Avendus MD & CEO, said. India's hedge fund industry, registered under market regulator Sebi's Alternate Investment Fund Category-III, has around $3 billion in assets currently. KKR-backed Avendus onboarded pioneering onshore hedge fund managers Andrew Holland and Vaibhav Sanghavi last year as part of the asset management build-up.

"We are gearing up for $8-10 billion in hedge fund assets over the next five to six years, as clearly some large Indian hedge funds are emerging," he added. Edelweiss (Rs 2,500 crore) and DSP Merrill Lynch (Rs 3,200 crore) are among the other notable domestic hedge funds, while TCG Asset Management and Reliance Nippon have also announced plans for AIF-III foray.

Last year, Avendus acquired UK-domiciled Ocean Dial Asset Management, a long-only India-focused hedge fund with AUM topping $600 million. Classic long-short hedge funds deploy complex investing strategies to bet on asset prices rising and falling, often with leverage or borrowed cash. Recent years have seen hedge fund managers tapping long-only products — where they only bet that stocks, bonds or derivatives would go up — to expand client base into less risk averse investors.

Avendus said HNIs and family offices accounts for 41% of the hedge fund client base, followed by private banks and wealth managers (28%) and corporate treasuries (14%). Holland and Sanghavi launched Avendus Absolute Returns Fund which raised Rs 3,300 crore, almost touching Sebi-prescribed upper limit of 1,000 shareholders, a first since the market regulator allowed onshore hedge funds formally. The second scheme Avendus Enhanced Returns Fund, launched later, has mopped up more than Rs 700 crore in domestic money as of now.

Vohra said Avendus would tap the global network of its majority shareholder KKR to expand its hedge fund client base globally. London-based Ocean Dial already has European institutions and family offices investing in India as clients.

However, taxation worries have impeded the growth of hedge funds. "In India, AIF-III taxation is at the fund level, while in other countries it is taxed at the investor level. Even in India, mutual funds are taxed at the investor level," said Sanghavi. Taxation at the fund level means the returns that the fund generates by investing is taxed. In case of taxation at the investor level, each individual investor is taxed for the returns they earn while the fund becomes a pass-through instrument in terms of taxation.

India's mutual fund industry, which is taxed at the investor level, have seen surging domestic inflows to cross $350 bllion in AUM. Globally, hedge funds ($3.3 trillion) have over 10% share of the asset management industry.