Hedge funds invested in India bore the brunt of the market sell-off last month, dragging down the year-to-date returns of these funds to under 10 per cent.
The hedge funds have also underperformed the Sensex in November.
According to a global alternative asset data provider, Eurekahedge, the India index was down 4.3 per cent in November.
Equity markets in India underwent a turbulent phase in November as a series of scams — including the 2G scam and allegations of senior officials in banks and NBFCs accepting bribes to give loans — rocked the market. Though the cut in large-cap stocks was relatively smaller, it was the small and mid-cap stocks that were pummelled in the sell-off.
Sensex lost only 2 per cent last month, while the BSE small-cap index lost 8 per cent and the BSE mid-cap index was down 6 per cent.
That the hedge funds underperformed Sensex points towards the greater exposure to high-beta small- and mid-cap stocks in hedge fund portfolios.
Due to lower liquidity, the impact cost in these stocks is greater and that results in deeper cuts once stock prices begin correcting.
Hedge fund investments in India are mainly through long or short equity funds and multi-strategy funds.
Fewer options available in investible asset classes make hedge funds move towards riskier small- and mid-cap stocks in India. It is, therefore, not surprising that the return on these funds fluctuates with the movement in equity markets.