Here are the investing secrets of the super rich

It's no longer just real estate and gold - high net worth individuals are increasingly parking their wealth in non-traditional investments.

The National Stock Exchange building in Mumbai. Many HNIs are investing in stock and index futures to build their portfolios The National Stock Exchange building in Mumbai. Many HNIs are investing in stock and index futures to build their portfolios


Anshu Kapoor, Head, Global Wealth Management, Edelweiss Financial Services
"Can I get exposure to a budding start-up in the e-commerce industry?"

"Can you provide me an investment vehicle to capitalise on arbitrage opportunities?"

"How can I invest in a new asset class like currencies?"

With changing times, these are the sort of questions getting thrown at us from our high net worth individuals (HNIs) and family office clients. The investor behaviour has evolved - clients are now not hesitant to tap into unconventional investment avenues. Let us take a look at some of the solutions across different asset classes that have gained traction over the last couple of years:

Allocation to alternate equity solutions

On the equity side, while mutual funds have shown growth in assets under management (AUMs), there are also a lot of other non-traditional investment vehicles that HNIs are investing in. Alternate Equity Funds, under the Category III Alternate Investment Fund (AIF) route, is one such example. Sophisticated investors are showing eagerness to move from long-only investments to special situation long-short and risk arbitrage opportunities. With corporate actions (IPOs, mergers and acquisitions, open offers, etc.) and government divestment picking up, the opportunities to capture such trades are also on the rise. Category III funds, with their multi-strategy investment schemes, provide investors exposure to such opportunities. They combine long-only strategies with opportunistic short and risk arbitrage strategies - such a combination provides more consistent and higher risk adjusted returns. Investments made under AIFs Category III have increased by approximately 220 per cent in a year to over Rs 1,500 crore in March 2015. (See graph on the right.)

Portfolio hedging and use of derivatives

Another trend we have noticed is the increasing use of derivatives. Some investors are building portfolios using stock and index futures, which provide them capital efficiency. Many investors are using derivatives to hedge their long-only portfolios in times of extreme volatility (like the recent Greece crisis). We have also advised some of our CXO-level clients, who have a significant concentration in their portfolios (in several cases, in multiples of hundred crores) due to ESOPs (Employee Stock Options) accumulated over the years, to hedge their exposure using derivatives.

Structured products for equity participation with protection

Structured products provide features that cannot be obtained through traditional investments in stocks and bonds. These products can provide capital protection and varying participation rates based on the investors risk profile. Investors are using these solutions to express a specific view on the market. For example, one of our clients had a pessimistic view on banking and was looking for ways to get exposure to the same. We were able to create a structure to provide him with 150 per cent downside participation (where client benefits from a fall) on Bank Nifty with capital protection. Moreover, a quarterly liquidity option provided additional comfort in case the client's view changed over the tenure of the product. We are witnessing increasing interest in such solutions amongst our sophisticated clients.

Ratan Tata, Chairman Emeritus of Tata Sons, has been parking his wealth in start-ups. He has already betted on 12: Altaeros Energies, Snapdeal, BlueStone, Urban Ladder, Swasth India, CarDekho, Grameen Capital, Paytm, Xiaomi, Kaaryah, Ola and Ampere Vehicles
Innovative solutions for fixed-income investments

Looking at the fixed-income space, investors are now accessing Interest Rate Futures (IRFs) to build long dated fixed income portfolios. An IRF provides the benefits of several maturity options, liquidity and capital efficiency. The daily turnover in IRF has grown substantially over the last financial year to almost Rs 2,000 crore (see New Avenues on next page).

HNIs who have idle stocks in their portfolio which they do not plan to sell in the near future, are now using Securities Lending and Borrowing Scheme (SLBS), which enables them to earn fee income by lending these stocks to counterparties who use it to take short positions. The average monthly transaction value for the last financial year was approximately Rs 400 crore.

One of the biggest changes seen in recent months is the popularity of arbitrage mutual funds amongst HNIs. Arbitrage funds, which are low-risk, aim to benefit from the price differential of a stock in the cash and future markets. They are treated as equity funds for taxation purposes and hence are not taxed if held for more than a year. Arbitrage funds have witnessed a remarkable rise of over 90 per cent in AUM (Rs 26,000 crore as of June 30, 2015) in the March-to-June 2015 quarter.

Currencies as an asset class

With the increasing volatility in global markets, investments in currency market are also coming into the limelight. Currency derivatives are being used not only for hedge exposure, but also to express views specific to a particular currency.

Trends in real estate

Coming to real estate, we are definitely witnessing an aversion to direct investments in residential properties (as a financial investment). Instead, we are seeing the preference towards investing in the asset class through non-convertible debentures issued by reputed developers or AIF funds. Investments by PE funds in real estate projects almost tripled in the first six months in 2015. On the commercial real estate front, investments in yield bearing pre-leased assets with quality tenants are generating substantial interest.

The number of high net worth households in India is now estimated at 137,100 with an accumulated net worth of Rs 128 lakh crore

Private equity

And last but by no means the least, with the rise and rise of investment activity in the start-up space, HNIs investors are also seeking a piece of the pie - either through direct investments or through private equity/venture capital funds. HNIs have invested more than Rs 1,200 crore into venture capital funds over the last year. Though many HNIs have realised the potential, there is a lot of scope to increase awareness about this as an asset class. The investment parameters are completely different compared to other investment instruments. PE/VC funds come with high return potential but the longer time horizon and illiquidity risk needs be taken into consideration before investing.

To sum up, it is clear that new and innovative solutions are here to stay given the interest they have been able to generate from HNIs. The wealth management industry now needs to create awareness about these solutions.