Veteran Hedge Fund Manager Loads Up Bearish Bets on India Rally

(Bloomberg) -- The rally that's lifted India's $2.2 trillion stock market to a record has prompted a veteran hedge fund manager to load up on bearish wagers in a fund launched two months ago.

“As there appears nothing fundamental underpinning this year's rally we have remained maximum net short on a portfolio level,” Vijay Krishna Kumar, head of liquid alternatives investment at IDFC Asset Management Co., said in an interview in Mumbai.

India this month became the first among stock markets valued at more than a $1 trillion to hit a new peak this year as foreigners plowed almost $10 billion into local shares in 2019, the most among major Asian markets. A bulk of the inflow is due to the “catch-up trade” after the country sat out a regional rally earlier this year, Kumar said.

While expectations that Prime Minister Narendra Modi will win a second term in the ongoing elections and bets that company earnings will recover added legs to the rally, headwinds are stacking up fast. The surge in prices of crude oil -- India's top import -- is combining with a slowdown in investment and consumption, all of which threaten to put the brakes on growth in the world's fastest-growing major economy.

“We are faced with worsening fundamentals and high valuations that have already priced in a rosy scenario,” said Kumar, who has two decades of investment experience.

Kumar, who began managing long-short strategies at London-based AGRA India Fund in 2006, joins other participants including Kotak Institutional Equities advising caution. For Kotak, the rally has made stocks expensive and there's a risk that the company earnings estimates will be reduced if slowdown in the economy gathers pace, analysts led by Sanjeev Prasad wrote in a recent note.

The IDFC India Equity Hedge Tactical Fund is betting on the stock-market swings amplifying in the run up to the election results on May 23, with the India NSE Volatility Index reaching as high as 30, Kumar said. That level was last seen months after Modi swept to power in May 2014, data compiled by Bloomberg show.

India equity hedge funds that follow a long-short strategy rose an average 5 percent this year after losing about 9.6 percent in 2018, according to Eurekahedge Pte estimates. The funds' best performance in the past 15 years were during election years of 2009 and 2014, with annual gains of about 50 percent, the data shows. Kumar's fund, that was targeting about 10 billion rupees at the time of launch two months ago, didn't disclose its assets under management.

Equities have priced in the possibility of the ruling party forming the next government with a reduced majority. A surprise victory for opposition parties could lead to an adverse reaction, Kumar said.

“Even if the current government comes back to power, as some expect, we're expecting a draw down of as much as 5 percent post results,” he said. “The markets are underpricing the risk of an adverse election outcome of the ruling coalition not getting a majority.”

To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net

To contact the editors responsible for this story: Arijit Ghosh at aghosh@bloomberg.net, ;Divya Balji at dbalji1@bloomberg.net, Ravil Shirodkar

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