With increasing popularity of hedge funds among HNIs, many AMCs are planning to come out with their own Category-III AIF or hedge funds to cater to the varied needs of such clients.
SEBI defines Category-III as “AIFs which use diverse or complex trading strategies and may use leverage including through investment in listed or unlisted derivatives.”
Category-III AIFs are often synonymous with hedge funds but there are two kinds of Category-III funds. The first category comprises long-only funds where the AIF fund managers run thematic long-only ideas and then there are true hedge funds which use strategies far more complex than a typical mutual fund which mostly focuses on generating returns through simple asset allocation.
A few AMCs such as HDFC, Reliance and Axis are planning to launch hedge funds.
While HDFC AMC in its draft offer document for its planned IPO has stated that they are looking to seek SEBI’s approval to launch a Category-III fund, Reliance Nippon Life AMC had also stated in their draft offer document for IPO that they too want to launch at least 6 schemes in this category. Recently, IDFC AMC launched its first hedge fund, IDFC India Equity Hedge-Conservative Fund in January.
Nalin Moniz, Chief Investment Officer – Alternative Equity, Edelweiss Multi Strategy Fund Advisors, believes that Category-III AIFs allow AMCs to use a wide range of strategies and innovations. “Category-III AIFs offer the benefits of pooling money like a mutual fund and much of the investment flexibility that a PMS offers. Fund houses are launching Category-III AIFs to take advantage of this dual benefit. The platform is robust, scalable and is starting to see wider acceptance among HNI clients,” Nalin said.
In mutual funds, fund managers have restrictions on the sector/stock as also the strategies they can deploy to run a fund.
Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital, points out that AMCs have expertise in dealing with listed securities, the underlying instrument of Category-III funds. “Though the fund house would require building a separate fund management team to run a Category-I (venture capital fund) or Category-II (private equity and debt fund), they can run Category-III funds with the existing team. Category-III invest in listed securities where the fund managers have expertise,” the CEO and Chief Investment Strategist said.
Talking about flexibility, he said, “In alternative investments, the fund manager does not necessarily remain within the limitation defined by the market regulator for a large-cap or a small-cap fund. Moreover, he can apply strategies such as long-and- short and long-only which is not allowed in mutual funds.”
Among fund houses that have AIFs, most run Category-III funds. Currently, Sundaram and Aditya Birla Sun Life offer Sundaram Alternative Opportunities Fund-Nano Cap Series-I and Aditya Birla Sun Life AIF Trust-I respectively. Other fund houses offering AIFs across categories include IIFL AMC and Edelweiss Global AMC.
SEBI data shows that Category-III raised commitments of Rs.29,000 crore in December 2017, which increased 186% in one year.