Long Short Funds: An Emerging Star in Indian Stock Market
If any Fund Strategy promises you to record gains in a down-trend, won’t you feel excited? Long Short Portfolio strategy which is relatively new occurence in the Indian Stock market assures such gains in adverse market conditions also. According to Trade Brains in India alone more than 35 Fund Managers have introduced this method and nearly Rs.15,000 Crores has been garnered in Assets Under Management (AUM). Long Short Portfolios are the largest Hedge Funds and fall under Alternative Investment Funds (AIF) Category-III or which as per SEBI norms comprises Hedge Funds and PIPE funds etc. With this prelude Zeva Astras post tries to explore whether Long Short Portfolio be an Emerging Star in the Indian Stock Market arena.
Fundamentals First
Before we dive deeper into the Long Short Portfolio Strategy let us focus on a few fundamental concepts like: What are different types of investment Funds and Strategies? that are widely employed in Stock Markets before the emergence of Long Short Portfolio methods.
Types of Investment Funds
Broadly 3 types of Investment Funds are employed in Stock Markets
- Equity and Debt Funds
- Portfolio Management Services (PMS)
- Alternative Investment Funds (AIF)
Equity and Debt Funds: Equity is investing in Stocks, Shares and Securities of various companies and will have higher returns with associated risks. But in Debt Funds investments are done in fixed income securities. They come with less risk and fixed returns.
Portfolio Management Services (PMS) offers customized or tailor-made investment in equity or debt asset classes to suit the needs of individual investor’s financial goals. Two types of PMS are 1) Discretionary and 2) Non-Discretionary. In Discretionary the Fund Manager is empowered to take decisions on behalf of the investors and in Non-Discretionary Fund Manager just advises the client. Basically PMS caters to High Networth Investors.
Alternative Investment Funds (AIF)
Here we have SEBI definition of AIF
Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities.
Category I AIF
AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds.
Category II AIF
AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012. Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.
Category III AIF
AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. [Ref. Regulation 3(4)©] Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs
We can understand AIF in a better way by comparing it with PMS services. Here are key differentiators between the two:
Types of Funding Strategies
Long only Funds
Long only Funds means taking only long positions in the assets owned. It means even during a bear market they will continue to buy stocks against the general trend. Simply taking a long position means the investor holds the stock with the expectation that the price will increase in value and fetches profit by going up.
Short only Funds
Investors or Traders will not hold on to the stock beyond one day. They sell it on the same day of buying them.
Long Short Funds Strategy
A long short strategy works on the principle of selecting a whole set of equities assigning them ranks based on alpha factors. Further the Investors will hold on to few stocks by taking long only funds strategy and for other stocks they will take the Short Only Funds strategy. In simple it is a hybrid of both Long only and Short only Strategy.
In addition, the Short Selling strategy employed in AIF funds proves to be a winner. Here is a simple description of this strategy for the readers.
Short Selling: A winning strategy
short-selling, is a mechanism where investors borrow assets and sell them. Later the investor will purchase the same number of the same type of securities and return it to the lender. Obviously if the price has fallen between the period of selling and buying the investor makes a profit. This strategy is also known as Sell Before Buy.
Advantages: Long Short Funds
- First and Foremost advantage Long Short Funds provide to Investors is the DIVERSIFICATION of portfolio. As the portfolio contains both Long Funds Stocks and Short Funds Stocks the investors will have a safer and profitable position in the market.
- Investors can reap gains when the market is in adverse conditions also. In fact Volatility always proves beneficial to Investors who are ready to take risks for better returns.
- SHORT SELLING PERMITTED always proves beneficial for Long Short Funds which is not permitted for any other types of Mutual Funds.
