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Category III AIFs are often considered synonymous with hedge funds. In India, there are two kinds of Cat III strategies– long only funds and long short funds.
In long-only funds, AIF fund managers run thematic long-only ideas like an equity mutual fund but with lighter restrictions. For instance, there is more leeway in terms of stock specific or sectoral weightage and fund managers can buy unlisted securities and derivatives.
On the other hand, long short funds can take two positions – long (buying) and short (selling) simultaneously. Simply put, long-short funds take a long position in undervalued stocks while selling short overpriced shares. These funds generate returns during volatile markets.
Both long only and long short funds are generally open ended in nature. However, exit load in long only funds is much higher compared to long short funds.
Cafemutual spoke to industry experts to understand when to recommend long only funds and long short funds.
Sharzad Sethna, Head of Business - Alternate Investments at ICICI Prudential AMC is of the opinion that long only funds can be recommended to clients with very high risk appetite. . He said that while chances of alpha generation are higher in long only funds, it is very risky compared to long and short funds.
Saurabh Rungta, Managing Director & CIO, Avendus Wealth said, “Long only funds make sense in today’s growth market of India. These funds are used for strategic allocation and become the part of the core portfolio as the view here is of long term.”
Shailesh Khatri, Senior Vice President, Motilal Oswal Alternates said that long only funds are good in a positive market conditions and long short funds do well in volatile markets. He said, “Long short funds have a debt part and an equity part. The debt part is less risky and can give a return upto 8-9% and the equity part is riskier and can give more returns. Here the timing of the fund manager has to be really good only then can the returns be above average.”
Yogesh Thakkar, Co-Head, Business Development, Karma Capital said that long only funds make more sense than other instruments only when they bring in a differentiated flavor to the investor’s portfolio.
He also said, “Long short funds can be good replacement of short term debt funds in mutual funds and work best in volatile markets as they give more chances to leverage position and generate more returns.”
Vikaas M Sachdeva, MD, Sundaram Alternates feels that long only cat 3 funds can be ideal for investors who understand the liquidity and risk trade-off and can stay invested for at least 4-5 years. He said, “Long only funds usually run concentrated strategies, quite often in less liquid stocks that unfold true potential over a period of time. These funds can also (usually don't) invest up to 49% of their corpus in unlisted space. Hence, these funds can generate better returns with calculated risks. On the other hand, long short funds take directional calls either way and generate returns more akin like debt funds, at the very least. These are bets which only someone savvy with a deep understanding of risk return trade-off, takes. It's not for the average investor.”
To help you understand more about opportunities in Cat III AIFs, Cafemutual is holding CafeAlt Conference at Taj Santacruz on August 23, 2024.