True Beacon's hedge fund outperformed the markets. Here's how

In March as the market fell, True Beacon, a hedge fund, was well positioned to take advantage of the volatility. Over the last year, it has returned 27 percent with almost all its outperformance coming after and on account of the market fall in March.

As markets have rallied since then, CIO Nikhil Kamath has increased his hedging and says he may not outperform from here on. He’s still bullish on large banks, Reliance Industries and Infosys. Excerpts from an interview with Forbes India:

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Q. How did you manage the volatility in March?
Ours is more like an all-weather fund and less like a mutual fund or a large cap fund. We have a big hedging component and the amount of hedges we have is dynamic. We would like to beat the Nifty by 6-8 percent. In the last year, the fund has outperformed the Nifty by 26 percent.

We were hedged 80 percent before the pandemic started. That is when we got most of our alpha.

Q. How did you decide when to get back in the market?
Again, we reduced the number of hedges and managed to catch the rally. We were very hedged when it fell, and we reduced the number of hedges when it went up. When the markets fell, we had a 10 percent alpha, and in the subsequent months we kept garnering more alpha. We have again gone back to being 80 percent hedged—if the markets go up from here, we won’t make so much, but if they fall we are well positioned.

Q. What were the data signs flashing in March that caused you to increase hedging and what are the signs flashing today that have caused you to increase your hedges?
It is just the correlation between the fundamentals of a company and the price it is trading at. Right now, there is a lot of pain on the ground. Many promoters are talking about how badly they are doing but the stock prices are not reflecting it. We find it hard to be long on these companies.

Q. What would it take for you to reduce your hedges? 
A market fall. Our approach has always been capital protection, so if the market goes up and we go up less, we are okay with that. We are okay giving up the last 10 percent.  A lot of the correction had to happen in banks and financials. I am bullish on SBI, Kotak and HDFC Bank. I don’t like the NBFC space much, but our largest holdings are Infosys and Reliance, and we are very bullish on them.

Q. The way banks and consumers led the rally for the last decade, are you seeing any signs of what sectors can lead the next rally?
To be very candid, innovative companies in India like Flipkart are not listed, as they will always have access to private capital from overseas. So even if funds that invest in these companies make 3-4 percent yield, they are good with the investments. As long as those companies don’t list in India, we won’t have access to those opportunities.

In India, you lose 5-10 percent of the value of the company in book building and marketing during the IPO process.

Q. Given that you invest in Nifty stocks, clients could pull their money out very quickly. Did they do that?
The volatility happened so quickly that they didn’t get the opportunity to pull it out. But given that we did quite well as a fund, existing clients are adding money.