Interview with Pashupati Advani, India Advisor,
Avatar Investment Management
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
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
How has the Avatar India Opportunities
Fund fared in the few months since its launch
in September 2005, vis-à-vis the Indian
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
- 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
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
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.
Avatar Investment Management
+91 22 2267 1533
+230 212 9800
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