On Indonesian Funds: Hedging A Fall

by Guinandra Jatikusumo


A few weeks ago I wrote about how the Indonesian government, through its macroprudential laws, prohibits any shorting activities in the Indonesian stock market. Given this restriction, I was wondering what would Indonesian small and second-level investors (like me) do to partake in potential profit-making situations when the market goes bear.

Just hours ago, a friend of mine (Ilya) recommended to long Exchange Traded Funds (ETFs) or Index Funds whose yields negatively correlate with the Jakarta Composite Index: inverse-exposure stocks/portfolios. So when the market goes down, the fund goes up, vice versa. This is one good idea, but unfortunately, such fund is not commercially sold unless an investor directly manages his/her own portfolio by either: i) being an active trader at the Jakarta Stock Exchange, ii) appointing a broker and actively managing the portfolio, ensuring that its beta coefficient is negative, iii) hiring a personal asset manager at an asset management firm.

I went to a mutual fund yesterday to confirm this. (Yes–the day after I visited the mutual fund to talk about the issue and to open a mutual fund account, Ilya messaged me on Facebook about the exact same issue. What a coincidence). After opening my first mutual fund account (an early birthday present!), I talked to one of the marketing officer about the strategy. As expected, those ETFs don’t exist. The investor needs to construct a replicating portfolio by his or herself, accompanied by an asset manager. I then asked about publicly available Indonesian funds out there, and he gave me a broad list:

  • LQ45: An index consisting 45 blue-chip equities, updated every 6 months, based on the companies’ liquidity levels and market capitalization.
  • Sectoral: A portfolio which comprises companies from 10 different sectors in Indonesia: agriculture, mining, consumption goods, properties, infrastructure, etc.
  • Jakarta Islamic: 30 companies whose stocks fulfill the Sharia criteria. Weightings in the portfolio depends on liquidity levels.
  • Bisnis-27: This one is pretty new–a daily newspaper named Bisnis Indonesia partnered with the stock exchange to list 27 top-performing Indonesian companies (based on fundamental analyses).

Curious about their performance, I tried Bloomberg-ing them against the Jakarta Composite Index. Unfortunately only the LQ45 is listed. But I’m pretty sure the others’ annual performance is similar:


Guessing from its general form, the fund moves together with the Jakarta Composite Index. No way that a trader can use this to bet against a dwindling market. Again, this is only LQ45–but I’m very sure that the others are the same. So what should people like me do?

Several options available:

  • Form your own bear portfolio by pooling stocks with negative betas. The thing is, it might be challenging to find a platform to get such list of stocks (not sure, once one have a trading account I think it’s readily available). However, I’m still pessimistic about the liquidity level of these equities considering Indonesia’s top 45 liquid & fundamentally sound stocks have positive betas.
  • Invest in derivatives: buy put options or sell call options. This idea is viable–we do trade options in Indonesia, despite the fact that there’s a policy of automatic exercise. In Indonesia, options will be automatically exercised once prices are below or above the threshold (strike price) by 10%.
  • Work hard and smart and get that first $20,000 to be eligible to short here.
  • Learn Cantonese and go to Hongkong. Alright I’m kidding about this one.

Relevant side note: The efficient market hypothesis doesn’t really apply here in Indonesia. Mutual funds do beat the market, though of course not always. [Paper in Bahasa Indonesia].

Irrelevant side note: In response to a significant Rupiah depreciation and an increasing trend in inflation and capital outflows, our interest rate was raised by 50 basis points just two days ago. My floor at the Central Bank of Indonesia was full of people midnight before the governor announced it. It was amazing to be in the same floor with the economists and central bankers who actually contributed to making the decision. [Article in English].