US-64 is not run like a hedge fund

Kunal Shah
03 January 2002

Market experts, however, do not subscribe to the view. "The NAV of the mutual fund represents nothing but the current market value of the portfolio. Thus, the first reason cited in the report is totally baseless."

The unit capital (asset base) of US-64s investments as on 28 December 2001 was pegged at Rs 13,895 crore. The NAV at Rs 5.81 per unit as on the same date works out to Rs 7,424 crore. That means, the total asset base is funded out of unit-holders capital of Rs 7,424 crore and borrowings of Rs 6,471 crore.

Let us understand how the mutual fund operates. When the value of assets goes into a tailspin, the mutual funds borrow amounts to the extent of the shortfall between the outstanding unit capital and the market value of the portfolio. The shortfall have to be funded through either borrowings or internal accruals, so that in case of redemptions the fund is able to repay without further depletion in the market value of the portfolio.

US-64 has done exactly this borrowed funds to meet redemptions. Since the US-64 portfolio has depreciated due to lower stock prices, the difference between the unit value and the portfolio value is glaring. Another important point to be noted is that US-64 has become NAV-based only for the past two days. Till July 2001, when the sales and repurchase activites were suspended, the repurchase price was broadly considered as the NAV of the scheme.

US-64 is continuing with the repurchase price till May 2003 for retail investors up to 5,000 units concurrently with the NAV-based pricing mechanism for larger investors. This means that US-64 will face redemption pressure for another 17 months, as the repurchase price ranging between Rs 10.50 to Rs 12 is higher than the NAV-based price.

Now let us look at how hedge funds, or more specifically leveraged funds, operate. Based on a small pool of unit-holders funds, these funds borrow from the market to fund a bigger pool of investments. The returns on this larger pool of investments, after deducting the fixed interest to be paid to the lenders, are then distributed to the small pool of unit-holders.