A dramatic rise in demand from Indian high net worth individuals (HNIs) for alternative investment funds (AIFs) is part of a structural shift in how domestic investors approach diversification, according to Sandeep Das, Barclays’ head of private clients in India, who told Asian Private Banker a rapidly expanding product universe will further drum up tailwinds for the product class.
More recently, bouts of volatility, due in part to a mammoth general election, earnings results, and global market movements would have increased investor interest in uncorrelated assets. NSE’s India VIX index, which tracks market expectations of near-term volatility, spiked to 28.08 in late-May — its highest level since May 2014, and alpha was difficult to come by in the lead-up to the election.
However, Das said the rise in demand for alternatives speaks to a broader shift in how Indian investors — whose exposure is domestically skewed and limited to mainstream assets — approach diversification, both in terms of classes and geographies.
“From a demand perspective, we are seeing traditional asset classes give way somewhat to alternatives in the sense that long-short funds and structured debt funds are gathering a lot of AUM, although this isn’t an overnight phenomenon,” he said.
Ever since Indian regulators unveiled AIF regulations in May 2012, inflows have not only been robust, they have outpaced flows into mutual funds. In fact, AIF commitments raised have grown 7x in the past two years, according to Das.
“To put that in perspective, AIF commitments raised were 3% of mutual funds AUM just three years ago, but now, the total commitments raised by AIFs has crossed 10% of mutual fund AUM in India,” he said.
Indeed, recent data from Bain and Company shows that the number of AIFs registered in India jumped from 268 in 2016 to 518 as at February 2019, while funds raised by AIFs in 2018 are estimated to have reached US$7 billion — well up from approximately US$2.4 billion in 2016.
Of those alternative funds that have received the most attention, Das said real estate, private equity, and structured debt account for around 70% of commitments, with the balance including infrastructure, pre-IPO and special situation plays. He also sees emerging opportunities in venture debt and non-real estate structured debt.
“So while alternative investments represent a far newer category of investments and are accessed by a much smaller category of sophisticated investors, this structural shift has nevertheless occurred,” Das continued.
“And don’t forget, beyond their potential to deliver uncorrelated returns in alternative strategies, AIFs also have the benefit of being a more differentiated structure than mutual funds in the long-only space because more concentrated holdings are allowed, there is no restriction on new funds in similar strategy classes, no daily NAV pressures, no compulsion on disclosing underlying portfolio holdings, and reduced paperwork (compared to PMS) and target drawdowns.”
Meanwhile, in the public market AIF space, a few managers have taken the lead with long-short strategies and there has been an increase in new managers engaging in such strategies as long-short, long-biased, and systematic trading.
However, at this juncture, Indian investors are not exactly spoiled for choice when it comes to quality AIFs. For example, Barclays currently tracks around 15 onshore AIF managers in the hedge funds space and is unlikely to expand its recommendation base until the universe widens and deepens further, Das concluded.