Category 3 AIFs see steady growth in ‘18

: The volatile secondary market has not affected the mood in the alternative investment fund (AIF) segment, with public market-focused funds, or category 3 AIFs, seeing several new registrations in 2018.

According to data from markets regulator Securities and Exchange Board of India (Sebi), at least 24 new category 3 AIFs have been registered so far this year, just a little shy of the 27 registered last year. This, when the benchmark Sensex has fallen 3.5% since the start of the year, as compared with the 28% gains in 2017. Since the AIF regulations came into being in mid 2012, 91 category 3 AIFs have been registered with Sebi, with more than half of the funds being registered in the last two years. Last year, category 3 AIFs raised ₹14,333 crore. In the first half of 2018, such funds have raised ₹8,136 crore, data from Sebi shows.

According to industry experts, the category 3 AIF format offers several advantages over mutual fund and portfolio management services (PMS), which are attractive to investors, especially in volatile markets. “The rationale why one would look at a category 3 AIF in today’s market is that some of these, not all, are strategies that are not fully linked to capital market movements or they allow a different risk-return trade off to be created,” said Anshu Kapoor, head, Edelweiss Private Wealth Management.

Kapoor added that the AIF structure allows for hedging strategies to be incorporated, which a mutual fund does not offer to the investor.

“Today if you invest in longonly mutual fund, by nature and mandate, the mutual fund is typically fully invested in whatever scheme that you invest in, so it is highly correlated to that benchmark. Now, if you have to hedge as an individual investor, you have to understand how to do it on your own. But there could be opportunities for investors to go out and do it in an AIF, through a strategy such as long short, which tries to bring down the volatility of participating in equities,” said Kapoor.

It is not just the hedging strategies that are making category 3 AIFs popular, said industry experts. The format also offers several other benefits that make it operationally more efficient for fund managers and investors. “AIFs offer several advantages over mutual funds and PMS, which are only to play long equities. But an AIF could be to pursue a long-short strategy, to access multi-managers, or take advantage of a drawdown structure so that investors can come in a staggered manner,” said Srikanth Subramanian, senior executive director, Kotak Wealth Management.

Given the drawdown feature of the AIFs, as and when the market improves, they can help investors get into long-only equity in a staggered manner, instead of making a lump sum investment, he added.