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Hedge funds were all over the Indian startup scene last year. Look around now and it will be hard to spot one. They have simply fallen off the cliff in 2016.

There have been only 10 deals involving hedge funds in the first three quarters of 2016, compared to 50 deals in the same period last year, shows a study by tech industry think tank iSPIRT and advisory firm Signal Hill.

Source: An iSPIRT & SignalHill report.

Hedge funds typically manage billions of dollars and find alternative investment avenues for high returns. Traditionally, they invested in listed companies, but later moved into growth stage startups just like big VCs. The hyperactive one in the startup space is Tiger Global, which has US$20 billion under management.

Last year, Tiger Global was the most active hedge fund in India with 24 investments amounting to US$1.2 billion in the first three quarters, including follow-up rounds in Flipkart and Ola. This year in the same period, it made only three investments, worth US$305 million in total. Some other hedge funds which were active last year, like Falcon Edge and Steadview, disappeared altogether. Overall there has been an 87 percent drop in hedge fund investments this year.

See: Can’t eat paper profits: India’s startup ecosystem has a vital cog missing

Starving unicorns

Hedge funds invested US$3.9 billion into Indian startups – almost entirely in consumer tech – from the start of 2015 to the end of Q3 2016. Eighty percent of it was absorbed by just eight companies:

The biggest of them – Flipkart, Snapdeal, and Ola – have been struggling to raise follow-up funding this year, and the main reason for that is the flight of hedge funds from India. Tiger Global, for instance, made further investments in Shopclues and Hike this year, but not in its biggest bets, Flipkart, Ola, and Quikr. Oyo raised another round from Japanese giant SoftBank this year, but its American hedge fund Greenoaks Capital did not participate in the round.

Rollercoaster valuations and uncertainty over how long it will take to make decent exits have discouraged the hedge funds. India’s unicorns seem disinclined to go for IPOs. Flipkart, for example, has been around for nearly a decade, but it’s unlikely to get a great reception on the stock market. Even its valuation has had a series of markdowns, dropping down to US$6 billion from its high point of US$15 billion last year. Snapdeal has a similar story, which forced SoftBank to write down its first major investment in India.

See: Something’s rotten in India’s startup scene – and it’s time to call it out

Trapped Tiger

Tiger Global’s experience in India illustrates the dilemma faced by hedge funds. The New York-based hedge fund tasted early success with its investments in JustDial and MakeMyTrip: it booked 15x returns on its US$23 million investment in JustDial after it had an IPO in 2013.

Hedge funds are fair weather friends. They will be back in India just as fast as they’ve left.

The subsequent mobile internet boom, with the advent of affordable smartphones, made the India story sexy. So the hedge fund went on the rampage investing in ecommerce startups big and small, even encroaching on the usual VC territory of early growth stage investments. But its experience has been tepid to say the least, since the MakeMyTrip and JustDial days.

Its recent exits from Caratlane, which got sold to the Titan Group, and Babyoye, which got sold to the Mahindra Group, barely covered the investments. The bigger bets it has made – Flipkart, Ola, Quikr – are nowhere close to giving spectacular exits. On the contrary, their path to profitability and IPOs looks increasingly dubious in the face of strong global competitors like Amazon, Uber, and OLX.

Hedge funds are fair weather friends. They will be back in India just as fast as they’ve left. But for that to happen, the Indian startup scene needs a few big winners and more high value exits.

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