FW: Duggal's India Hedge Fund Eliminates Bullish Bets on Elections

May 15 (Bloomberg) -- Sanjiv Duggal, the HSBC Holdings Plc
asset manager who predicted the rebound in Indian stocks this
year, said the hedge fund he manages has eliminated bullish bets
on equities due to the uncertain outcome of the elections.
India's ruling Congress party-led coalition and the main
opposition-led group may have each failed to secure enough votes
to form a government, based on exit polls after a five-week
election that ended May 13.
"The risk is high from a market perspective, and that's
why we've taken down our exposure," Singapore-based Duggal, who
oversees $4 billion of Indian equities, the world's largest such
holding outside the nation, said in an interview yesterday.
"The risk near-term is predominantly election driven."
Duggal's Halbis India Alpha Fund, with assets of more than
$90 million, was at its most bullish level in March, before a
rally in the nation's stocks began. Its net exposure -- the
difference between bets that stocks would rise and wagers they
would fall -- was at the maximum of 40 percent. The portfolio
has brought down its net exposure to "zero" because of
"uncertainty over election results," he said.
Indian stocks fell yesterday after exit polls indicated no
single political party will win enough votes to form the next
government ahead of the official count on May 16.

Recent Rally

Speculation that a coalition led by the opposition
Bharatiya Janata Party, called the National Democratic Alliance,
might win the elections contributed to the market's recent rally,
Duggal said. The benchmark Sensitive Index, or Sensex, climbed
57 percent in dollar terms from its March 9 low to May 12.
"The risk-reward is not favorable in the near term,"
following "the fastest 50 percent rally" in India since 1991,
when the nation started opening its economy to the world, Duggal
said.
"Three to four months ago, market participants were
expecting the worst case scenario," which was a government that
wasn't led by either the governing United Progressive Alliance
or the National Democratic Alliance, he said.
Government spending, which was increased ahead of the
election, will also likely slow, Duggal said.
Indian Prime Minister Manmohan Singh may need support from
regional parties to continue ruling the world's largest
democracy.
Six television networks forecast the ruling alliance led by
Singh's Congress party may emerge just ahead of its chief rival.
CNN-IBN predicted Congress and its allies will get as many as
205 seats compared with a maximum 185 for the opposing coalition.
Star News-Nielsen and News X gave the Congress-led bloc 199
seats to 191 for the BJP-led group.

Previous Elections

Duggal said he predicted five years ago that the BJP-led
block was unlikely to get re-elected, contrary to market
expectations. "This time around, it's a lot tougher to take a
call," he said.
There's a less than 10 percent chance that the Third Front,
a loose coalition of smaller parties including the Communists,
would win the elections, Duggal said.
After the last elections, the Sensex plunged 11 percent on
May 17, 2004, as investors feared that Communist allies in the
new government would slow the pace of reforms.
The Halbis India hedge fund will reassess its portfolio
after the elections, depending on the outcome, he said. It's set
to attract funds from existing and new clients, following
withdrawals in the fourth quarter of last year.
"Given the volatility in the market, we are a lot more
active in managing our positions compared with the first 18
months of the fund's life," he said. "We're not expecting
outflows going forward."
The fund, which targets a gross annual return of 20 percent,
gained 13 percent this year.