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Global hedge funds are making a beeline to set up shop in India, a market long-shunned by international investors, tempted both by its growing depth and liquidity and its emergence as an alternative to investing in China.

Singapore-based multi-strategy hedge fund Dymon Asia Capital and Citadel Securities are among funds and securities brokers entering a market they had smaller exposure to in the past, worried about tax issues and their ability to hedge investments through short-selling.

Dymon, which currently manages around $2 billion in assets, is applying for an investment advisory license and opening an office in Mumbai.

“Traditionally, the main drivers of performance within our equities business have been Greater China and Japan,” Dymon co-CEO Mark Wong said.

“But in the last 12 to 24 months, India has become more and more of a significant contributor in terms of returns and risk-taking in the overall portfolio."

Some funds highlight India's economic opportunity, its rich pool of local talent and stable regulatory environment, while the spurt in trading volumes has also made it easier to hedge positions or pursue typical long-short equity strategies.

India’s stock market valuation has doubled in just three years to as much as $3.8 trillion in September, and that depth is enabling it to substitute China in global portfolios as investors flee battered mainland markets.

Prashant Kothari, senior investment manager at Pictet Asset Management, points to how Indian stocks have received foreign inflows of around $6 billion so far this year, representing more than half the total net inflows into global stocks.

Sectors such as energy, defense, technology and pharmaceuticals will continue to benefit, he said.

Sachin Kewalramani, portfolio manager and head of Asia fundamental equities at hedge fund Citadel, said the firm was looking to hire more investment professionals and engineers from India for its international equities team.

The market has “all the ingredients to continue attracting substantial investment”, he said.

Citadel Securities, the market-making arm of Citadel, is also expanding quickly in India, and it has a local team of 10 in Gurugram where it opened last year.

QUANTS AND STOCK-PICKERS

Apart from stock pickers, funds with quantitative strategies are flocking to India.

Gao Capital, a multi-strategy hedge fund based in Singapore with around $100 million under management, is setting up infrastructure to trade derivatives in the market, alongside a four-year-old local private equity strategy.

“Volume has picked up tremendously since COVID, so it's become a situation where there's enough volume to support market neutral quantitative trading that we see a real opportunity,” said Chauwei Yak, Gao's CEO.

Yak said they were in the process of opening an office in Bangalore overseen by an Indian native cofounder.

Bigger global quant funds, such as New York-headquartered Tower Research and Amsterdam-headquartered Optiver, are expanding in India as well, according to industry sources familiar with the matter and LinkedIn job advertisements.

"We are excited by the business opportunity in India, the long term potential of the market and the economy, the tremendous source of talent, and the stable governance and regulatory environment," said a Optiver spokesperson.

Tower didn't reply to a Reuters' query.

Dymon's Wong said the new office in Mumbai will make it easier for analysts to be closer to the companies they cover. Yet he also notes India is still “not easy to navigate”, because of challenges around regulatory requirements, taxation and liquidity.

For some funds, those challenges remain a barrier.

“There have been a lot of changes in India over the years as far as the tax changes and the shorting rules, it was just never something where we felt super comfortable with,” said Patrick Ghali, managing partner of hedge fund advisory firm Sussex Partners.

Very few managers across Asia have made money in India, Ghali said. “Yet they still persist because of this idea that it's a growing market and economy."