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In 2017, Category 3 AIFs raised ₹14,333 crore while in the first half of 2018, they raised ₹8,136 crore, data from Sebi shows. Graphic: Mint
In 2017, Category 3 AIFs raised ₹14,333 crore while in the first half of 2018, they raised ₹8,136 crore, data from Sebi shows. Graphic: Mint

Category 3 AIFs see steady growth amid volatility in markets

At least 24 public market-focused alternative investment funds (AIFs) have been registered in 2018

Mumbai: 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 to 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 long-only 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.

“Many AIFs are also coming in as multi-manager platforms i.e. through one AIF you can invest money with two or more managers and you can also have very customised UHNI/family-specific AIFs. So we are also seeing some trends in terms of large families trying to consolidate their pools of investments in a specific AIF," said Subramanian.

According to Kapoor of Edelweiss, category 3 AIFs are becoming more attractive due to the access to new ideas and strategies that they are providing to investors.

“The structure provides access to ideas that you cannot do on your own, or is hard to do in a mutual fund format. You get access to strategies that alter the risk-return payoff so that they are not 100% correlated to capital market movements or interest rate movements," said Kapoor.

Subramanian of Kotak added that while the market for category 3 AIFs has been growing, it is yet to see full rigour, while taxation still remains nascent and untested in India.

“However, AIFs are proving to be very operationally-efficient platforms and you will see AIFs take a lot of market share away from PMS. That trend is clearly on the rise."

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