The National Stock Exchange (NSE) has issued notices to at least three Hong Kong-based hedge funds for their activities in the Indian derivatives market. Among them is Sebes Befut Ltd, a Category II FPI. The identities of the other two funds remain unknown. These funds have chosen to remain anonymous due to the sensitivity of the ongoing investigations.
Hedge funds are actively managed funds focused on alternative investments that commonly use risky investment strategies. A hedge fund investment typically requires accredited investors and a high minimum investment or net worth. Hedge funds charge higher fees than conventional investment funds.
Stock exchanges like the NSE serve as the first level of regulation in the Indian market, overseeing transactions by brokers, mutual funds, and FPIs. The NSE noticed that Sebes Befut frequently reversed its trading positions within a short time frame at prices significantly different from the previous trade prices. This raised suspicions about the nature of their trades.
In the cases of the other two funds, there are suspicions of synchronized trading, where orders were pre-arranged to execute at specific times. All three funds have responded to the NSE’s notices, asserting that their trades were executed by automated systems without human intervention. They argued that algorithmic trading uses complex data to devise strategies, and any perceived irregularities were not intentional.
Industry experts note that Hong Kong provides hedge funds with more flexibility compared to some other jurisdictions, attracting global regulatory scrutiny. There have been regulatory proceedings against Hong Kong-based funds in the US, UK, and Singapore, indicating a broader concern.
The Indian derivatives market is drawing significant attention as foreign funds take substantial positions, often acting as counterparties to domestic retail traders. Recently, a lawsuit involving Jane Street, a UK-based proprietary trading firm with assets worth $62 billion, and Millennium Management has shed light on how foreign portfolio investors (FPIs) are generating considerable profits through their trading models in India.
While the NSE and the involved funds are yet to make public comments, the investigations continue. This situation underscores the growing influence and scrutiny of foreign funds in the Indian financial markets, highlighting the need for robust regulatory oversight to ensure market integrity.
