How India’s Largest Hedge Fund Avendus Capital Deals With Volatility  

India’s largest hedge fund sits on the sidelines when volatility spikes.

A man sitting on a bench at the seafront looks out towards a dredging vessel operating at the construction site of the Colombo Port City development in Colombo, Sri Lanka. (Photographer: Taylor Weidman/Bloomberg)
A man sitting on a bench at the seafront looks out towards a dredging vessel operating at the construction site of the Colombo Port City development in Colombo, Sri Lanka. (Photographer: Taylor Weidman/Bloomberg)

Avendus Capital Public Markets, India’s largest hedge fund, had shrugged off a surge in crude and a weaker rupee. Then defaults by Infrastructure Leasing & Financial Services Ltd. rocked the markets.

The current rout was triggered by liquidity concerns, according to Vaibhav Sanghavi, co-chief executive officer at Avendus Capital Public Markets. “When Nifty 50 was at 11,700 points, we still held on despite high valuations, rupee deprecation and macro headwinds. But the trigger point was what happened in the debt and credit market.”

“We immediately saw what’s happening and did our course correction,” Sanghavi said. “We were already in significant cash and actively hedged to protect the portfolio.”

Andrew Holland (right), chief executive officer at Avendus Capital Public Markets, and and Vaibhav Sanghavi, the co-CEO. (Photograph: Avendus)

Avendus Capital Public Markets prefers to be on the sidelines when volatility spikes, CEO Andrew Holland told BloombergQuint in an interview. “We sit in cash during binary events,” he said. “I would rather protect the capital.”

Volatility, as measured by the India VIX or fear gauge, had spiked to its highest since February when fears of a contagion from IL&FS debt defaults roiled shares of non-bank lenders last month. Avendus chose to hold 50 percent investments in cash. Its Absolute Return Fund returned 0.2 percent gains in September when the benchmark Nifty 50 fell 6.5 percent. Avendus’ Enhanced Fund fell 8 percent during the month.

The Absolute Fund buys stocks that are expected to rise in the long run and short sells the futures of the ones likely to fall in the near term. The objective is to conserve capital, go in cash in case of volatility, said Sanghavi. Enhanced Fund, he said, will invest in 15-20 high-conviction ideas that can reduce the downside.

Avendus Capital is a category-III alternative investment fund, a class of funds that pool in money from rich and sophisticated investors with a minimum ticket size of Rs 1 crore. It has a corpus of little over Rs 7,000 crore—nearly Rs 4,500 crore in Absolute Return Fund launched in March 2017 and around Rs 2,500 crore in the three-year, close-ended Enhanced Return Fund launched in December last year.

Its peers include DSP Alternate Investment Fund which runs six schemes with a total corpus of around Rs 4,000 crore and Edelweiss with Rs 2,400 crore under two schemes at the end of August, according to SEBI data. Franklin Templeton is the latest to launch such a fund. Information on performance, corpus and investments of individual AIF schemes is not available publicly but is submitted to Securities Exchange Board of India periodically. Such funds nearly raised $5 billion in the year through June, about half their total fundraise since the regulator allowed them in 2012.

The Next Emerging Risk

Avendus contributes a quarter of the investments by category-III funds, according to Sanghavi who moved to Avendus in 2016-end along with Holland after selling their hedge fund Ambit Alpha to the Edelweiss Group. And they are banking on that experience going into the next year or so.

That’s because Holland and Sanghavi see the 2019 general election as an emerging risk. Holland cited the example of the previous Lok Sabha polls when he managed Ambit's Alpha fund. In 2014 from March when timetable for the elections was announced to the day of exit polls, the fund sat on 80-85 percent of cash. “We deployed after the exit polls in May; the index gave a return of 5 percent and we gave a return of 8 percent in the month of May 2014.”

The strategy for the next one year remains the same. Sanghavi said they will be happy to not generate returns in a volatile phase if they are able to protect capital, he said. “If we remove the risk aspect of investing, there would be ample opportunity to make money later on.”