'Long-short SIFs are designed for seasoned, high-risk, high-reward investors, who understand market volatility.'
At least 10 asset management companies are preparing to launch long-short equity funds for high-net worth individuals.
These will operate under Sebi's new Specialised Investment Fund (SIF) framework, which needs a minimum investment of Rs 10 lakh.
Sebi has introduced seven categories of long-short funds: Three equity, two debt, and two hybrid-oriented.
How these funds work
Long-short funds aim to generate returns in both rising and falling markets by taking long positions when prices are expected to rise and short positions -- via futures or options -- when prices are expected to fall.
"This dual ability allows the fund manager to generate potential returns regardless of market direction," says Radhika Gupta, MD and CEO, Edelweiss Mutual Fund.
"The fund manager also has the flexibility to hedge their portfolios or create option strategies to benefit from volatility," says Vaibhav Shah, head - products, business strategy and international business, Mirae Asset Investment Managers (India).
Higher return and risk
These funds enjoy greater flexibility than traditional mutual funds, which are long only and gain only when prices rise.
In falling markets, they either stay out or decline alongside.
SIFs can take naked short positions up to 25 per cent of portfolio value.
"SIFs allow fund managers to identify opportunities and go short on some stocks. If the call goes right, the fund gains value, helping not only in capital protection but also return generation," says Anand Vardarajan, chief business officer, Tata Asset Management.
Shah adds that these funds have the potential to generate alpha in range-bound and bearish markets. However, long-short funds also come with higher risks.
"Both long and short calls can go wrong, leading to dual-sided losses. If not managed well, these strategies can result in significant return volatility," says Gupta.
High risk appetite a prerequisite
These funds are suited for seasoned investors.
"Long-short SIFs are designed for seasoned, high-risk, high-reward investors, who understand market volatility," says Shah.
They should not be treated as get-rich-quick schemes.
"Investors must have the patience to let these strategies play out," says Santosh Joseph, CEO, Germinate Investor Services.
Gupta emphasises that these funds can suit a range of risk profiles.
"Conservative investors may prefer strategies that use short positions primarily to hedge risks. Aggressive investors may opt for funds that take active short calls to generate alpha," she says.
Vardarajan cautions that first-time investors should steer clear of them.
"Investors who prefer simple strategies should also stay away," says Abhishek Kumar, founder, SahajMoney.com.
Allocation and horizon
Long-short equity funds fall at the aggressive end of the equity spectrum.
Kumar suggests allocating 10-20 per cent of the equity portfolio to them, depending on the investor's risk appetite.
"These funds can partially replace traditional equity exposure, but should not be core holdings," he says.
Experts suggest a five-year horizon for the higher-risk funds. "Lower-risk SIFs may require shorter horizons," says Joseph.
"Wait for 12 to 18 months for a track record to develop. Even though established AMCs are launching them, these new products do not have an India-specific performance history," says Kumar.
Joseph advises investing only after assessing their performance against traditional mutual funds.
"Check whether the SIF aims to use short positions for risk reduction or return enhancement. Read the fund's strategy and risk disclosures carefully," says Gupta.
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Feature Presentation: Aslam Hunani/Rediff
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