(Adds more details from letter, information on fund, analyst
By Nishant Kumar
April 23 Macquarie's Asia hedge fund
has exited its short positions in Indian single stock futures in
response to a controversial set of proposed tax rules that could
lower investment returns.
Instead, it has decided to use a futures contract linked to
India's 50-share NSE index Nifty on the Singapore Exchange to
get its short exposure to India, according to an investor letter
of the fund seen by Reuters, a switch other funds may also make.
The $1.5 billion Macquarie Asian Alpha Fund, one of the top
performing in Asia and among just the 30 or so hedge funds with
$1 billion or more in the region, also cut India long exposure
in March, joining a number of foreign investors reducing their
holdings in the country ahead of the expected tax rules.
Foreign investors have raised concerns on two recent Indian
provisions to tax indirect investments and combat tax evasion.
The first gives India power to retroactively tax the
indirect transfer of assets. The second targets tax evaders via
the General Anti-Avoidance Rule (GAAR), putting the onus on
investors registered in countries with special tax exemptions
with India to prove they do not intend to explicitly avoid tax.
The Macquarie fund's India stock short positions dropped
from 2.6 percent in February to nil in March, while the gross
exposure, or the sum of its long and short positions, fell to
3.2 percent from 5.4 percent, according to the investor letter.
Nick Bird, the Macquarie fund's portfolio manager, told
clients in the letter sent last week that the fund could become
liable for capital gains tax on unrealised gains after April 1
and open positions in single stock futures, which roll monthly
in India, might attract tax.
"We realised gains in long Indian stock positions which had
performed strongly since we entered into the positions," Bird
told clients, adding the fund also did not roll over single
stock futures exposure.
Going long refers to buying and holding a security to sell
at a higher price. Taking a short position means selling a
security that one does not own, in the hope of repurchasing it
at a lower price and profiting from the price differential.
The fund booked profits in Tata Motors, Welspun
Corp, Hexaware Technologies and Oil &
Natural Gas Corporation, the newsletter showed.
"These changes were unfortunate given we prefer, for risk
control reasons, to gain our short exposure via individual
stocks rather than index futures contracts," Bird wrote.
"Also, it reduced our gross exposure in India at a time when
we were seeking to increase our overall gross exposure."
Bird guided clients to his co-portfolio manager Andrew
Alexander for further information. Alexander declined to comment
when contacted by Reuters. A spokeswoman for Macquarie could not
be reached immediately for comment.
Pranav Sayta, a partner at Ernst & Young in India, said
there was still a lack of clarity on GAAR but if the current
provisions are implemented as they are one cannot rule out the
risk of tax authorities attempting to treat investment gains
from India's single stock and index futures as short-term
capital gains in which case foreign investors may be asked to
pay at least 30 percent tax.
He said the situation was fluid but a move to Nifty futures
listed on Singapore Exchange was likely to avoid such tax.
The market-neutral long/short hedge fund from Macquarie
Group has tripled assets since the start of 2011.
It generated a return of 9 percent last year when
Asia-focused hedge funds, as measured by the Eurekahedge index,
lost 8.3 percent. The fund has returned 1.3 percent in 2012 till
(Additional reporting by Rafael Nam in MUMBAI; Editing by
Michael Flaherty and Muralikumar Anantharaman)