Monsoon Capital Founder Describes Capitalizing on a Booming Market

Gautam Prakash faced a number of challenges when he looked to launch a hedge fund in India four years ago. The country was still relatively unknown to big foreign investors, the market was highly volatile, hedge funds had a high failure rate, and Prakash had no track record investing in India. “Aside from that, everything looked great,” he said.

Prakash, who graduated from Yale College in 1991, offered this assessment to the Yale School of Management’s South Asian Business Forum on May 1, as the last of about a dozen speakers to appear before the student club this school year. For nearly an hour, he explained how he launched one of India’s most successful hedge funds, taking advantage of a booming market through a combination of hard work, the right contacts, and timing. “I asked myself where global growth was going to come from over the next 20 years,” he said. “It was obvious India would be one of these countries. There were plenty of dark clouds — it wasn’t all a warm, sunny picture. But it was clear that India was a huge opportunity.”

Prakash worked at McKinsey for a couple years after graduating from college. He took a job with Bessemer Venture Partners in 1993, eventually heading the company’s healthcare group. He then moved to India, where he worked as a consultant for two years before launching Monsoon Capital.

In late 2004, Prakash started Monsoon Capital with $4.9 million raised from family, friends, and the connections he made working for nearly 10 years in the venture capital field. Prakash said the situation in India favored a well-run hedge fund. There were over 10,000 public companies in the country, but few analysts to study them. And, he said, most investors were interested in the short-term, leaving a huge hole for a group to do deep research for long term investing. “When we finally launched,” he said, “we had three people in two offices and no new funds planned. Now we have 27 people, five offices, two funds with $1.2 billion, and two new funds launching. We made an early decision to focus solely on India, because we felt the only way we’d have an edge would be to have all our eggs in one basket. And we had to be local. If we were just doing it with a Bloomberg terminal from New York, Washington, DC, San Francisco, or Hong Kong, it would be a recipe for disaster. We had to be on the ground. There’s an important distinction between being lucky and smart.”

Since Prakash had no direct experience running a hedge fund, he couldn’t just appeal to the capital markets for funds and expect the money to pour in. Instead, he did what many entrepreneurs do when they first start out. First, he put whatever money he had into the company. And then he appealed to friends and family. Or as he put it, he asked people who wouldn’t care how their money did with him. “These are folks who are coming in for other reasons,” he said. “What they did was allow us to build a track record we could show to other investors. The beauty of hedge funds is you have a track record after day one.”

Monsoon Capital enjoyed huge returns as the Indian stock market boomed. Over the past three years, the company’s flagship Monsoon India Inflection Fund enjoyed average annual returns of nearly 70%. Prakash credits this to a combination of skill and the luck of investing in India at the right time. But while the Indian economy has changed dramatically since he first started Monsoon Capital, Prakash admits it’s still uncomfortably volatile. The Indian stock market has swooned this year, erasing more than 25% of the value of the main Monsoon fund. Prakash said that because he looks long term, such swings aren’t alarming. He said he expects the markets to recover quickly, but that they will probably continue to be volatile for some time. “When we started, it was like shooting fish in a barrel,” he said. “Just about anyone could make money. Now, it’s harder.”