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Long short AIFs, a type of CAT-III AIFs have been getting popular among HNIs. These funds aim to offer high returns with less volatility.
This is the oldest and most common hedge fund strategy. Fund managers following this strategy buy a stock, which is undervalued (stock A) and sell a stock, which is overvalued (stock B). By doing this the fund manager makes money irrespective of how the market moves so long as price of stock A is higher than price of stock B. The idea is that, the fund manager researches both stocks to buy and stocks to avoid. By betting on both, the fund manager reduces market risk.
However, there are simpler mutual fund options in the hybrid space that have delivered comparatively higher returns and remained less volatile. Let us look at why hybrid funds can be better choice for HNIs compared to long short AIFs.
- Regulation: SEBI regulations are more stringent for mutual fund schemes as it is a retail product. Retail products require greater regulatory oversight to protect the interests of investors compared to AIFs, which target more sophisticated investors
- Transparency: Fund houses and AMFI disclose NAVs of mutual funds daily. This makes them more transparent than long short AIFs that disclose NAVs on monthly basis
- Diversification: Hybrid mutual fund schemes invest in a mix of equity and debt instruments, providing diversification benefits to HNIs. On the other hand, AIFs with a long-short strategy focus on specific sectors or stocks, which may not match diversification offered by hybrid funds
- Risk: In general, long short AIFs are more actively managed and may carry the risk of fund manager positioning, as they involve taking both long and short positions through complex strategies
Let us look at the performance of long only AIFs versus hybrid funds across categories. Data is as on Nov 30, 2022.
We have considered median performance of the schemes under each hybrid MF category:
|
Performance (Pre- Expenses, Post Tax) |
Conservative Hybrid Funds |
Balanced Advantage Funds |
Aggressive Hybrid Funds |
Absolute return fund I |
Absolute return fund II |
|
3 Yr CAGR (%) |
9.3% |
10.9% |
9.4% |
2.8% |
5.7% |
|
5 Year CAGR (%) |
7.4% |
8.5% |
7.7% |
- |
6.5% |
|
Performance (Post- Expenses, Post Tax) |
Conservative Hybrid Funds |
Balanced Advantage Funds |
Aggressive Hybrid Funds |
Enhanced Return Fund-II |
Long Short Fund- Series 1 |
Alternative Equity Scheme |
|
3 Yr CAGR (%) |
7.3% |
9.4% |
7.5% |
7.3% |
7.5% |
4.6% |
|
5 Year CAGR (%) |
5.5% |
6.5% |
6.2% |
- |
- |
4.5% |
The performance of AIF is available as given above, i.e. Pre expenses & Post Expenses
Tax rate considered is 11.44% for MF and 43% for AIF (inc. Cess & Surcharge rates)
Overall, hybrid funds across categories have performed better than AIFs with a long-short strategy.
Sandeep Kulkarni is the founder of Moneyworks4u, an AMFI registered MF distributor. The views expressed in this article are those of the author and do not reflect the views of Cafemutual.