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AMFI, in consultation with SEBI, is likely to allow fund houses to launch long and short equity funds, Option Based Portfolio Insurance (OBPI) and Constant Proportion Portfolio Insurance (CPPI) under the new Specialized Investment Fund (SIF) framework, said two people aware of the development.
One of the officials told Cafemutual that fund houses will start venturing into SIF through long and short equity funds. However, fund houses will not be allowed to do leverage to run a long and short strategy like Cat III AIFs. Further, shorting will not be allowed in a security held under long strategy, said the official.
Long and short funds is the oldest and most common hedge fund strategy. Similar to Category III AIFs, the long-short equity funds can take two positions – long (buying) and short (selling) simultaneously. For instance, if a fund manager is bullish on IT sector and bearish on banking sector, he can invest in IT sector by shorting stocks from banking sector.
Simply put, long-short funds take a long position in undervalued stocks while selling short overpriced shares. By doing this the fund manager makes money irrespective of market movements. These funds are similar to hedge fund lite, which is available in US markets for retail investors.
Another official said that AMFI is exploring opportunities for fund houses to invest in derivatives via OBPI and CPPI.
While OBPI is a set of strategies in which either a conventional put option (protective put) or a replicated put option (synthetic put) is used to insure a portfolio against unfavourable price movements, CPPI is portfolio insurance that sets a floor on the value of a portfolio and allocates assets accordingly.