Avatar Investment Management (AIM) is the investment advisor to three funds. Headquartered in Mauritius, the funds are focused on the Indian public and private equity markets.
- AIM runs three India-focused funds - absolute return, opportunities and growth. Could you briefly discuss the differences among the products offered and the associated return and risk levels?
The Absolute Return Fund is a fund to be run without loss of principal. In particular, strategies like cash and carry and basis trading is done. India has a robust single stock futures market, which provides liquidity and thus this strategy.
The Opportunities Fund is a long/short equity fund, with the bulk of its investments in very liquid stocks and all of its investments in the top 500 stocks in India.
The Growth Fund is like a private equity fund, investing in less liquid stocks and those that are not in the top 500. This fund can also invest in real estate.
The bullish trends and increased liquidity of the Indian markets in the recent past, suggests overstretched valuations in the near, if not current, term. For instance, it is estimated that the Indian equity markets have seen capital inflows to the tune of US$ 700 million in January alone. What risk management practices does the fund have in place to cope with such contingencies?
Though valuations seem to be overstretched (an index PE of about 16), there is a revaluation going on in India. Multinationals seem to be buying out their local partners at high valuations. Foreign direct investment is also rising. With Asia as a whole being re-rated as an investment destination and India more so, we are able to take advantage of this. As far as risk management is concerned, we do have a short position (as on date our gross exposure is over 90% and our net is 35%) as a means of protecting against "overvaluations".
- Given AIM's India-centric investment mandate, how do you see the lack of diversification in country risk affecting fund performance in the long term?
Our mandate is to invest in India-specific companies - something that we believe that we have an edge in. As India is the investment destination of the moment, we try to maximise risk-adjusted return in this space. We do not pretend to do country allocations. That we leave to our investors. At the moment, money is coming into the asset class rather than leaving it.
- What is the typical holding period of your funds' investments? For longer term opportunities in illiquid asset classes, what kind of exit strategies do you have in place?
Our longs tend to be held for significantly long time periods, as we are making stock-specific picks. Our shorts are primarily in single stock or index futures and thus have to be rolled every month. We have a risk management criterion for liquidity that would preclude us from getting trapped in illiquid assets in the Opportunities Fund, the subject of this article.
How has the Avatar India Opportunities Fund fared in the few months since its launch in September 2005, vis-à-vis the Indian equity markets?
Our longs have performed as good, if not better than the market (which we consider to be the S&P Nifty 50 Index). However, our shorts have done better relative to the market and thus our risk-adjusted return has been good.
- Could you briefly review the current regulatory environment for hedge funds in India and how that is shaping competition there?
Hedge funds are not encouraged as investors by the Indian regulators. However, they have granted registration to managers that they feel are more long term in approach. There is nervousness about the asset class due to the mayhem that was caused in the late 1990s in Asia. The Avatar India Opportunities Fund (AIOF) is a long/short equity fund that is India-centric.
There is a growing trend of global players setting up offices in Asia as well as of more single country-focused (as opposed to a generic Asian focus) funds. How does AIM view this increasing competition?
As in any business, there is bound to be competition. Our aim is to achieve steady returns, with no shocks so as to attract long-term investors. We feel that we have a following that will continue to support us. We have strong local advisors who we feel should allow us to provide an edge, which we will exploit to make a difference.
- Observers of the Indian markets claim that the short term could be choppy while the long-term story continues to be positive. What do you see as key risks in the Indian outlook for the year ahead, for your fund as well as for the economy in general?
Short-term volatility provides opportunities that the AIOF ought to be able to convert into returns. As you rightly say, the long term seems to be buoyant. The key risks are only political, which seem to be more and more remote as the political situation stabilises. The risk is only that India may do about-turns in certain reforms, but if the recent budget is anything to talk about, this seems highly unlikely. The main risk is that the market moves up too fast - as markets cannot go straight up.
And lastly, what is your take on opportunities in the Indian real estate market?
Title in Indian real estate is always difficult to determine. Also a number of real estate projects tend to have hidden liens (very difficult to determine). The space is getting more efficient as there is now computerised registration coming in for property. This makes it an interesting time for investment. Also India, if it is to follow the other more developed emerging markets, is poised for an upward movement in real estate, due to better title, loan availability at cheaper rates and rising salaries (thus more affordability). Thus Indian real estate is poised for a boom, taking the rest of the economy with it.