In a first, hedge funds see a drop in commitments
CY20 also witnessed a slowdown for other kinds of AIFS
Wealthy investors’ commitments to invest in sophisticated funds which look to provide market-beating returns have declined for the first time on record.
Total commitments to category III alternative investment funds (AIFS), which include hedge funds, dropped by ~1,326 crore in 2020. Commitments fell from ~48,151.4 crore at the end of 2019 to ~46,824.9 crore at the end of December 2020, according to the regulatory data, which is released with a lag. This is the first time that commitments have seen a decline since records are available (from 2012).
The Securities and Exchange Board of India (Sebi) had come out with regulations for alternative investment funds in 2012. It includes three categories. Category III allows funds to invest borrowed money to increase returns. This is the category under which domestic hedge funds register with the regulator. Hedge funds often take positions which allow them to profit from the markets going up or down. Category III also includes other funds that only look to make money when the markets go up. Category I funds invest in start-ups and social ventures, as well as small and medium enterprises, among others. Private equity funds and schemes investing in distressed assets are among those that make up category II.
Ashish Shanker, deputy managing director at Motilal Oswal Private Wealth Management, said poor traction for equity schemes among the wealthy may have played a role in the slowdown. Also at play could be the fact that category III funds are subject to higher levy. “For many clients, it becomes quite taxing,” he said.
The government had raised the maximum tax on individuals and trusts to 42.7 per cent in 2019. Unlike many schemes, category III AIFS do not have a pass-through status. This means that they, and not their end-investor, pay the tax on any income over~5 crore. This means of every ~100 made after this threshold, around 42.7 per cent will be paid as taxes. This may make it more tax-efficient for the wealthy to invest directly, rather than come in through a fund, according to experts.
Investments in equity MFS have also been going down. They dropped for seven months in a row as of January, Business Standard had reported earlier. Investors reportedly pulled out over ~42,000 crore from equity schemes since July as investors booked profits amid all-time highs, and others chose to invest directly in the stock market.
The absence of new product launches during the pandemic year may have had an impact on new commitments, according to Anshu Kapoor, who heads Edelweiss Investment Management at Edelweiss Financial Services.
“The market environment was not conducive to launch new products,” he said. Kapoor said that the scenario may change in 2021.
Commitments have grown 27.1 per cent across all categories. This is the slowest since 2012. Category II funds have been the fastestgrowing among the three, driving overall growth. It saw commitments rise 35.3 per cent over the previous year. The category includes distressed funds, which have gained in popularity in recent times. Category I schemes are up 9.1 per cent in commitments over the previous year. AIFS have a minimum investment of ~1 crore.