Dalal Street Voice: Indian markets seem to have embarked on a multi-year bull run from November 2020, says Rishi Kohli

The Indian markets seem to have embarked on a multi-year bull run from November 2020 so, we are only 1-year old into this 5–6-year secular rally, Rishi Kohli, Managing Director and CIO - Quant Strategies, Avendus Capital Public Markets Alternate Strategies – said in an interview with Zeebiz’s Kshitij Anand.

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Kohli has over 20 years of rich experience in the Indian capital markets. He, along with his team, is responsible for creating differentiated long-short strategies with strong risk-adjusted returns for the Indian markets using their quant expertise and extensive experience.

Edited excerpts:        

Q) Indian markets cooled off from highs amid weak global cues. What is your view on markets? Is it because D-Street seems to be factoring sooner than expected rate hike?

A) The Indian market has been one of the best performing markets this year and currently has rich multiples as well. With initial euphoria and improved earnings on the back of re-opening post Covid lockdown, investors have started taking a more balanced view on the markets and hence, the higher multiples and strong performance of markets are making them cautious.

Further, the tapering has begun, and rate hikes are bound to happen sooner or later. Therefore, some bit of caution is definitely warranted from a short-term perspective.

At our end, since we focus on quantitative analysis for the markets, we also find that the markets could see some decent decline at some point in the next 3-6 months based on some very rare and long-term quant signals that we have got.

However, the positive side to this is that on a long-term basis, the Indian markets seem to have embarked on a multi-year bull run from November 2020 so, we are only 1-year old into this 5–6-year secular rally.

Hence, by being cautious in the near-term, one also needs to keep plans and dry powder ready to buy into that decline for this multi-year bull run.

Q) What are your views on the IPO market for the rest of FY22? The new-age businesses are difficult to interpret and many of these themes will make their debut in the next 3-4 months. What are the key parameters to look at?

A) The IPO market has been strong and robust over the past year as the markets have rallied and remained strong which is quite typical of IPO markets even 20 years back.

So, the euphoria and panic in IPO markets remain strongly correlated with the mood of the underlying markets overall. The big change currently is the listing of these new-age digital and tech-enabled businesses which we had never seen and until very recently, the thought was that a lot of these will list in US as Indian markets may not give them as much value.

However, this has been proven wrong and the IPOs of these businesses have been very strong. I think in the longer run, markets will differentiate between start-ups that are genuinely robust and have strong long-term potential of not only revenue growth but profit growth and cash generation as well.

Investors will also track those IPOs that have managed to get strong revenue growth and huge customer base but where the robustness and long-term sustainability is a question.

So, I do not think that all these new-age businesses are not strong and will not sustain in the long-run. However, there will be a separation of wheat from the chaff.

Q) Inflows in equity MFs were the lowest – but SIPs continue to rise and shine. What does the trend suggest?

A) The rise in SIPs and current stability in their flows is something to stay for sure! The sooner participants understand this structural shift the better for them.

Remember, we have been saying for more than 20 years that Indian markets have low retail participation in terms of direct equity holdings and also equity participation through mutual funds, and the growth story for India has always been that this percentage will rise similar to other global markets.

And now that this is finally happening, a lot of us are sceptical about this trend and trying to outguess it which does not make any sense! Here is a trend which we were all waiting for and is being driven by the younger population.

One must understand how they think and their habits to get comfort with the fact that this is a sustainable structural shift rather than dismissing the trend and thinking this is a sign of euphoria.

As I said above, this is a multi-year bull run which is only 1-year old right now and the euphoria happens at the fag end of multi-year bull runs and not at the start.

Q) So where are the money-making opportunities in this market?

A) I follow a quantitative investment approach and my team builds models to make financial decisions. Currently, quant strategies are not well represented in the Indian markets and are also less understood.

However, they have boomed globally, and some of the largest hedge funds and passive funds globally that have performed well are quant funds.

So, we see a lot of scope for various types of quant strategies to perform strongly in Indian markets over the next 5-10 years at the minimum before they get large enough or popular enough that the alpha comes down which happens with a lot of quant strategies when they become too large or too many people start doing similar things.

As we are far from reaching that stage and are in fact at the infancy of this big boom ahead, there are a lot of solid sustainable quant strategies like managed futures and market-neutral based equity long-short which we are already implementing at Avendus.

These strategies have immense scope besides others like smart beta passive strategies, volatility arbitrage and factor quant strategies that we plan to focus on given their scope for making strong alpha in the Indian markets.

These are new ways of making money from the Indian markets and we think there is huge scope for such quant and data-driven approaches for India over the next 10-20 years

Q) Avendus has one of the largest alternative investment management platforms in India, and currently manages six funds under the three different product offerings with a total AUM in excess of USD 1 billion. What are the quant-based trading strategies you are applying to hedge exposure and maximize returns?

A) Over the past 11 years, I and my team have designed, tested and used various quant models under different market conditions. Hence, as quant investors, we worry less about whether the markets are rising or falling or what the popular sentiment is, as long as our strategies remain stable and robust to various types of market behaviour and perform as intended in different market conditions or regimes.

Our directional models which classify globally as managed futures, take advantage of the momentum and have higher long exposures on the Nifty and BankNifty index futures, if the market is showing strong upward momentum.

We go short exposures on these indices if the market starts showing strong downward momentum. So for these models, as long as there are sharp movements happening, it is a good market environment, and it does not matter whether it is up or down.

March 2020 was as good for these models as the upward trend over the past few months of August-October. After many years of lower volatility and momentum before 2020, our long-term models suggest that the market conditions have high probability of being gaining much higher momentum and volatility over the next few years, thereby becoming highly conducive for such managed futures strategies.

Equity market-neutral is another type of strategy we are very focused on. So far in India, market-neutral has been synonymous with pair trading or what is globally called ‘statistical arbitrage’ in stocks.

However, it is a much vaster field and there are innumerable methods to define portfolios that choose 10 stocks long and 10 stocks short on various factors/themes/signals thereby having almost zero net exposure to equity markets and hence, not being exposed to any market risk or gap risk but still having the ability to deliver 15-18% returns which is pure alpha.

This is also completely missing in Indian markets and something we are very excited about at Avendus as we believe those kind of returns with low drawdowns while having almost zero net exposure to market direction is possible at good scale which most people in India are not aware of currently.

Q) Trillions of public and private dollars are expected to be poured into clean energy projects over the next decade. Have you increased exposure towards clean energy?

A) We are pure quant investors focusing on public markets and stocks and derivatives of most liquid stocks and indices.

Q) In simple terms how would you explains long short funds to investors and how do they help in creating alpha?

A) Long-short funds at a very basic level are used to refer to funds that go both long as well as short the equity markets via stocks and stock derivatives which means that some of their positions benefit from the markets going up and some of their positions benefit from the markets going down.

Traditionally, in India, we had long-only funds as there was no way to short the markets before the onset of equity derivatives in India till around 2001.

Post that, it took some years for the liquidity to increase across different segments of the equity derivatives market. In the current situation, there is high liquidity for most types of long-short strategies to be implemented efficiently and at scale.

As there are multiple ways to go long and short, the equity markets using various index, stock futures and options, there can be many different types of long-short strategies implemented in the Indian markets.

Different strategies create alpha in different ways with zero or low net exposure strategies like our flagship fund - Avendus Absolute Return Fund and potential market-neutral quant strategies not being exposed to market direction and still capturing good consistent returns which is pure alpha by basically betting on relative outperformance of some stocks to others and capturing the same.

Other strategies like Managed Futures which we are using in our Avendus Enhanced Return Fund, create alpha by capturing the strong downsides also apart from the upsides.  

Across a longer-term market cycle which would see markets going up/down/sideways in different phases, such strategies can outperform normal equity markets with much lower losses which leads to alpha generation and strong risk-adjusted returns while also being an important value-add as a diversifier to any portfolio due to its low correlations to both equity and debt markets.

Q) Tell us a little bit about yourself – when did you fell in love with equities/Quant and decided that you want to get into managing money/making strategies?

A) My favourite subject in school was Maths and within that my favourite topic was Probabilities. I then did my Mechanical Engineering from IIT Kanpur and my MBA in Finance from IIM Lucknow.

So, a mix of maths, probabilities, engineering, programming and finance has been at the core of whatever I have done in my school/college days, and that just stayed with me once I started my career in 2001.

I was lucky that equity derivatives started in India around the time I joined my first job at ICICI Securities (I-Sec) and my firm was among the first institutions to take initiatives in that space so I got involved in that division soon after joining.

As it was nascent days for the derivatives industry, very few professionals had knowledge/experience/inclination for the space which meant that even though I was a fresher, I was as experienced as anyone else and with hard work and persistence, I could rapidly move up the learning curve and gain strong experience early on.

This created a good base for me and helped me progress from simple derivative strategies to more complex strategies to finally quant strategies using a mix of equities and derivatives.

After the initial feel-good, semi-entrepreneurial phase of starting an equity derivatives institutional broking desk and ramping it up to be among the top 2-3 institutional desks in the country was over at SSKI Securities (which later became IDFC Securities) in the 2004-2007 period, I started realizing that my inclination was to develop new quant based strategies for the Indian and Asian equity markets.

This was more relevant and possible on the buy-side rather than the sell-side and hence my transition from the sell-side to buy-side happened when I joined hands with a US firm to launch the first quant fund for Indian markets which was for offshore investors.

Post that, for some years, I also managed an Asian fund, trading managed futures quant models across all liquid futures among Asian equity indices like Nikkei, Topix, Kospi, HSI, HSCEI, Taiex besides the Nifty. This Fund won awards for being the Best Managed Futures Fund in Asia also some years back.

This global experience is something I also use while developing quant strategies for the Indian markets as that helps avoid a lot of pitfalls and issues and develop very robust approaches to the quant process.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)