Arcstone Looks For Passage To India

Nov 21 2007 | 10:50am ET

There’s a new hedge fund in Hunt Valley, Md., looking for investment opportunities halfway around the world. Arcstone Capital last month launched the Passage to India Opportunity Fund, an equity micro- to small-cap long/short vehicle, to take advantage of the burgeoning equities market in India.

The fund is managed by Ralph Kruger, a former assistant portfolio manager at Maryland-based Marathon Capital Management, a U.S. small- and micro-cap investment advisory firm. According to Kruger, the characteristics and complexion of the Indian marketplace is very similar to the U.S., but with higher growth rates and lower valuations.

Kruger utilizes a Mumbai-based investment advisory firm to help source investment ideas. He also travels to the region extensively and said he spends up to half of his time between home base north of Baltimore and India. “The whole idea is to see the company and talk to management before the analysts start to follow so that requires reading non-financial material and doing fundamental research on companies not covered by the brokers,” he said.

On the long side, the Passage fund is an opportunistic vehicle looking for profitable companies with little leverage on their balance sheets and experienced management teams. According to Kruger, short candidates are harder to come by than their long counterparts. “It’s very difficult to find a good short candidate in India so we use that very judiciously as a byproduct of our strategy,” he said.  

Although the fund is structured as a hedge fund, Kruger takes a private equity-like approach to the market. The Passage fund has a three-year investment period with low turnover. “Returns have been decent but we do not talk about month-to-month returns,” he said. “Although we’re structured as a hedge fund, there’s a difference between looking at monthly returns and being investors. We’re even reluctant to say on a quarterly basis what our returns are.”

Uncertainty For Hedge Funds

The Indian marketplace took a turn for the worst last month for many hedge funds as Securities and Exchange Board of India Chairman M. Damodaran declared that foreign institutional investors registered in India will have to stop selling participatory notes, which are financial vehicles based on Indian securities that are bought by overseas investors and hedge funds who are not registered to invest directly in Indian markets, and will need to wind up their existing positions within 18 months. Damodaran said the move was necessary to create transparency in the markets.

“SEBI’s actions have created uncertainties when it comes to participatory notes versus being on the exchange,” said Kruger, whose hedge fund is not affected by the new decree because it is registered as a sub-foreign institutional investor. “Ultimately, SEBI would like to pare down the p-note business and get everyone to go through FIIs. But the transition could be a little painful because of the uncertainty concerning p-notes."

The Passge fund charges a 2% management fee and a 20% incentive fee. There is a $1 million minimum investment requirement for institutional investors and $250,000 for individual investors. The fund sports a one-year hard lockup period.


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