Samir Arora is the Founder and Fund Manager of Helios. His partners at Helios Capital are Dave Williams, who was the Chairman and CEO of Alliance Capital Management for over 20 years and Karan Trehan who was Chairman of Alliance Capital Management (India) from 1994 to 2005. Helios employs six employees in Singapore and its exclusive advisor has three employees based in Mumbai. The four investment professionals at Helios and at the Advisor have more than 80 years of India investment experience.
Prior to starting Helios in 2005, Samir was the Head of Asian Emerging Markets at Alliance Capital Management in Singapore (both fund management and research, covering nine markets). From 1993 to August 2003, Samir was also the Chief Investment Officer of Alliance Capital's India business and managed all of their India-dedicated equity funds.
In 1993, Samir relocated to Mumbai from New York as Alliance Capital’s first employee in India to help start its Indian mutual fund business. He also managed the ACM India Liberalization Fund, an India-dedicated offshore fund from its inception in 1993 to August 2003. Prior to 1993, he worked with Alliance Capital in New York as a research analyst.
India-dedicated funds managed by Samir received over 15 awards during his tenure, including an AAA rating from Standard and Poor’s Micropal for four years in a row (1999 to 2003) for the India Liberalization Fund. In 2002, he was voted as the most astute equity investor in Singapore (rank: 1st) in a poll conducted by The Assetmagazine. Helios Strategic Fund has been nominated four times for the Best India Hedge Fund award in the Eurekahedge Asian Hedge Fund Awards and won the award in 2007.
Samir Arora received his undergraduate degree in engineering from the Indian Institute of Technology, New Delhi in 1983 and his MBA (gold medalist) from the Indian Institute of Management, Calcutta in 1985. He also received a master’s degree in finance from the Wharton School of the University of Pennsylvania in 1992 and was a recipient of the dean’s scholarship for distinguished merit while at Wharton.
Your flagship Helios Strategic fund was nearly 23% in 2012, while the Eurekahedge India Hedge Fund Index gained 12.35% over the same period. How would you explain such commendable outperformance?
We have had our good years and we have had our bad years. We are only proud of the fact that we had more good years and periods than bad.
Last year we added value on both the long and the short sides (i.e. our longs did better than the index and we lost less than the index on our short side). In each of the past eight years we have added value on the short book and on the long side in six out of eight years.
Which allocations across different industries and asset classes contributed the most to your returns over the course of 2012?
We basically concentrate our long portfolio in only a few themes/sectors. These themes/sectors do not change from year to year. We are bullish on private sector banking, non banking financial companies, consumer, media, pharmaceutical and IT sectors in general. We have also traditionally favoured the infrastructure sector but have been net negative on this sector since 2011 due to weak government decision making and policy paralysis in India in the past two years.
We normally avoid investing in commodity companies, state owned companies and companies which are aggressive in buying foreign assets.
Your fund was down a lot in 2008, how did this impact the functioning of your fund and the investment process in the following years? What changes have you applied to implement key lessons from 2008?
There were many things that went wrong for us in 2008. Having been a very successful fund manager since 1993, I was overconfident that the Indian corporate sector was not badly affected by the global crisis (and it was not - for e.g. not even one bank needed to raise a dollar for recapitalisation etc. and our portfolio companies had growth earnings even in 2008 to 2009) and therefore did not reduce my exposure to the market. As it turned out, the equity market did not spare any company whatever its fundamentals. Secondly, SEBI put restrictions on fresh shorting in October 2007 and therefore until late-2008, one could only short via indices and puts which did not add as much value as shorting of individual stocks would have done in that phase. Thirdly the INR depreciated by nearly 19% during the year.
The only way to protect performance in 2008 was to completely exit the market and we failed to do that.
The fact that our performance peaked in December 2007 and bottomed out (more or less) in December 2008, exaggerated the negative performance of 2008 (and also exaggerated the huge performance that we had in 2007 and 2009).
Despite the poor performance in 2008 our returns since inception and since end-2008 are much better than hedge funds in general.
We have made many changes to our risk controls (in terms of position sizes), shorting (primarily stock shorts now versus both stock and index shorts previously), more number of shorts (approximately 20 positions vis-a-vis approximately 10 before so that we can add to these existing positions at short notice without having to scramble for new ideas in bad times) etc. In general we are now much more paranoid about the downside and much more flexible about reducing our net (and gross) exposure in uncertain times. To paraphrase Peter Hien, we know that we will err and err and err again but hopefully less and less and less.
Can you elaborate a little on the investment strategy and themes of the Helios Strategic Fund? What sort of fundamental/technical analysis do you perform on the underlying securities prior to making an investment?
At Helios Capital we are 100% bottom-up fundamental analysts within the three big picture themes that we were employing since the 1990s in my previous job. These three themes are:
Buy companies that compete with the Government of India (or government owned companies):
India has allowed privatisation of sectors without privatising its incumbent government owned companies
Allows private sector companies to win at the cost of government owned companies due to better manpower, product, customer experience, technology, etc.
Major Sectors: Infrastructure (Ports/Airports/Roads/Power), Financials (Banking, Insurance), Healthcare, Education
Private sector financials, infrastructure, education, healthcare etc.
Invest in fast growth ‘New for India’ secular themes
Major sectors: air conditioning, wealth management and financial products, mortgage, retail, tourism, cable/satellite television, leisure, vocational education, gaming, liquor, branded goods
Factor cost advantage:
Capitalise on India’s ‘global competitiveness’
In these sectors, Indian companies do not yet compete with each other
Major sectors: IT, IT services, contract research, pharmaceuticals, auto ancillaries etc.
We normally avoid (not necessarily short) the following themes:
Global (and not Indian) demand and prices are main determinants of returns in most cases.
‘One Billion Consumers’ stories
There are ample opportunities of growth in various sectors which are under penetrated even in urban India.
Sectors where the investor has to rely on the billion plus Indian population to justify opportunity does not appeal to us for it invariably implies already well penetrated sectors.
Bet on India, not on Indians
We are negative on Indian companies expanding abroad aggressively
You launched the Helios India Alpha Fund in July 2011 which is also an India focused long/short equity fund. How is the investment strategy of this fund different from the Helios Strategic Fund? Are there any specific short-term opportunities that this fund is targeted towards?
With the Helios Strategic Fund we have an average net exposure of approximately 60% (90% long and 30% short).
We launched the Helios India Alpha Fund to have a low net exposure at all times and separately take higher conviction, specific event driven positions in a few stocks. However, we are rethinking the positioning of this fund as we find that in practice it is not turning out to be too different from the Helios Strategic Fund and creates confusion. We are therefore considering various alternatives (including merging it with Helios Strategic or converting it to a long only absolute return fund).
What sort of risk control structures do you have in place to manage your fund’s investments during different market conditions? Has your risk management been more stringent over the last two years, due to the high volatility across different sectors?
After 2008 we have become much more paranoid about the downside. I have had an incredible run in India investing since 1993 and always believed that we knew what we were investing in. In 2008 we discovered that the behaviour of investors could not be predicted and we have to learn to react to events that may have nothing to do with the fundamentals of our companies.
We are now relatively much more alert to global events and can quickly reign in our net exposure (to start with) by adding to our existing shorts. In some sense we have now created in-built short capacity by having nearly 20 short positions at all times. We can thus easily add weight to these names at any time and at short notice if we have a negative view on the market for any reason. This is much better and psychologically easier than shorting index in the face of some global events for we have much higher conviction in our individual short positions than we will ever have in shorting an index.
How have the recent regulatory changes in Singapore effected your fund’s operations?
Recent regulatory changes have not had any impact on our operations for we have always been well capitalised and have had deep operational strength. We have the same number of employees today as we had at the end of 2007 when our AUM was much larger.
Do you employ any leverage to enhance your returns? If so, how much leverage do you generally use and how is it distributed across different positions?
We do not employ any leverage. Our net exposure to the market is on average 60% (90% long and 30% short).
Fund raising has been a challenging enterprise for Asian hedge funds in general and Indian hedge funds in particular – how have you fared in this regard over the last two years?
We know that we have the track record, team, commitment and integrity to do well in this business. In the short term investors look at momentum of AUM raise as a key parameter and that is missing for all the India dedicated funds for us. Many investors believe that other investors know better than them and therefore herd into a few funds where there is momentum in AUM (we know and understand that as we have seen it ourselves in 2005 to 2007). Although wisdom of crowds cannot be denied this normally works when everyone takes an independent decision but here everyone follows one or two large investors. Our goal in the meantime is to improve and strengthen our performance for we know that this cycle will turn once again. We are here for the long term and have the ability to outlast this phase.
Over the past 20 years and in this hedge fund over the past seven and a half years, we have seen phases and periods much worse than just investor disinterest and have still totally enjoyed this journey.
Absolute return funds are the current flavour of the month. In recent years, fund managers have preyed on the fears of investors that quality investing cannot be done without three and five year lock ups and onerous liquidity terms. We have a track record of investing in India since 1993 in very liquid structures (mutual funds and monthly liquidity hedge funds) and we have never seen liquidity of the fund as a handicap. If an investor is choosing quality stocks (as it is always claimed) why is one so nervous or scared that he will not be able to even partially liquidate the holding (in the face of some redemption request) without causing permanent damage to stock performance and to other investors? What quality stocks are these which cannot handle even some selling without having their quality and performance permanently impaired?
From our side we know that although our performance in 2008 led to a lot of redemptions we remain 100% committed to our funds and our business. We are certainly proud of the fact that we acted professionally during that stressful period and have many instances where we went out of our way to accommodate investor redemptions. We have a deep sense of responsibility in managing investor funds and I and my team have had long and successful track record in India investing and we do not want our lives and our careers to be defined by what happened to our performance in 2008.
In 2005, 2006, 2007, 2009, 2010 and 2012 the fund has had significantly positive alpha (in 2011 even though the fund's performance was about 1100 bps better than the index, alpha was negative due to the low beta which leads to unintuitive outcomes when returns are negative). In the pre-2008 era we had annualised alpha of 29% whereas post-2008, annualised alpha has been of the order of 4% plus.
Is there a particular niche of investors that you are aiming to attract for investments into your fund? Would you like to comment on the profiles of investors in your fund and how you think the fund would be suitable for a potential investor looking to gain exposure to the Indian market?
India has been a great market for investors but is very volatile. We did badly for various reasons in 2008 but have still done better than most long only funds in absolute performance despite a much lower net exposure and lower beta. We have 90 months of monthly data for investors to analyse so we are not talking about what we can do but what we have done.
We are looking for quality investors - primarily endowments and family offices. As mentioned earlier, we are here for the long term and are absolutely determined to regain our stride that we lost in 2008.
In summary we have the following issues to highlight:
Alignment of interests:
Fund manager is currently top investor in both funds
Insiders invest on same terms as outside investors
Zero redemptions by employees since inception
Independent administrator for both funds
Compliance audit by Compliance Asia
No investments in unlisted securities - therefore no valuation issues
Institutional quality infrastructure
3 member experienced operations staff
Have over seven years of operating history & track record
Liquidity and transparency:
Monthly liquidity terms match underlying liquidity of investments
No provision of side pocket
No side pockets/change of terms in 2008
Complete 30 day trailing portfolio available to investors on non disclose commitment
Customised reports prepared on request
Commitment to business:
Same number of employees today as compared to end-Nov 2007
Most experienced team in Indian alternative funds industry
Gross performance since inception is ahead of market benchmarks with net exposure less than 60%
Positive Alpha in each of 2005, 2006, 2007, 2009, 2010 & 2012