India’s biggest hedge fund projects a 15-20% market correction in 6 months


MUMBAI: The buoyant domestic equity market may be in for its first rude awakening by the time the country rings in the New Year after a stupendous rally in the previous 18 months.

The country’s biggest hedge fund manager Avendus Capital Public Markets’ Alternate Strategies is expecting the benchmark indices to witness their first ever correction of the current bull market as their quantitative models hint at a possible 15-20 per cent drawdown in the next six months. A technical correction is when a security falls more than 10 per cent from recent highs.

“I think there will be bouts of volatility from here on. In 3-6 months, there is a high probability you get a reasonable correction,” Rishi Kohli, Managing Director and Chief Investment Officer for quant strategies at Avendus Capital Public Markets Alternate Strategies, told in a virtual interview.

Kohli’s premonition comes from his acumen to read signs in the millions of data points generated by the market on a daily basis. One data point that has stuck out like a sore thumb for the quant strategist is the relative strength index of the Nifty50 futures.

An RSI is an indicator that determines the momentum in the market and is used to gauge if the market is in overbought or oversold conditions.

The RSI for Nifty50 futures on a weekly basis crossed the 80-mark at the end of September, a phenomenon that has occurred very rarely in the market’s history. Similarly, the RSI for the index futures on a monthly basis was also close to the 80 mark, which had occurred previously at the end of 2014, end of 2007 and end of 2006.

“So basically, in periods post such readings, there have been 15-20 per cent corrections in the market within 3-6 months,” Kohli said.

For Kohli, the overextended readings on technical indicators like RSI are, in fact, evidence that this bull market may be one of the greatest in Indian capital market’s history.

“From a longer-term perspective, these readings only happen when long-term bull markets are there because sharper corrections happen in bull markets,” Kohli said.

As per his own analysis, the Indian equity market may be in its first secular bull market since the heydays of 2003-07. The quant strategist, who launched India’s first quantitative hedge fund back in 2007, expects this bull market to generate 18 per cent annualized returns in its life cycle.





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