AIF body to propose flexible strategies for schemes aimed at accredited investors

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Alternative Investment Funds (AIF), through a representative body, are set to formally request market regulator SEBI to allow flexible fund strategies catering to accredited investors, including higher derivatives exposure, multiple people familiar with the development told Moneycontrol.

Among the suggestions to be made by the Indian Venture and Alternate Capital Association (IVCA) include increasing the minimum exposure limit that AIF funds can have to derivatives. Currently, category III AIFs can take a derivatives exposure of 2x the value of the entire portfolio. This implies, if the portfolio value is Rs 100 crore, the derivatives exposure cannot exceed Rs 200 crore.

Recently, Moneycontrol reported that AIF fund managers were seeking a higher exposure limit and separate 'high risk' category of AIF schemes, betting mainly on the futures and options market.

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Accredited Investors

To qualify as accredited investors in India, an individual must have an annual income of equal or more than Rs 1 crore and a net worth of Rs 5 crore.

Globally, wealthy investors need to be accredited to access products like AIFs, and a self declaration to the effect is good enough.

Presently, in India, wealthy investors can tap AIFs by meeting the minimum threshold without needing to register as accredited investors. Should they wish to be certified as accredited investors, they will have to submit proof of income, such as tax filings. Hence, only a few investors have taken the effort to get themselves accredited, industry people said.

Horses for Courses

"If an investor is accredited, there is no need to impose a cap of 2x or have other fund restrictions," said Bhautik Ambani, CEO of AlphaGrep and co-chair of IVCA's category III council. Fund managers should have greater flexibility to design innovative strategies, currently unavailable in the market, he said.

Ambani added that this increased flexibility would encourage more investors to seek accreditation. There would be a push from both asset managers, who want to attract sophisticated investors, as well as from those investors that are seeking higher risk reward.

Currently, there are very few takers for SEBI's accredited investor regime, which began in 2021. According to media reports, the number of accredited investors stands between 150 and 200.

Exposure Norms

Even if the exposure limit is not raised, a tweak in regulations could help, said Rishi Kohli, CIO of hedge fund strategy at Incred Capital.

Kohli argues that the regulator should differentiate between net and gross exposure, wherein gross exposure provides a view of the total capital at risk, while net exposure gives a clearer picture of the actual risk, after considering hedges or offset positions.

The risk will be higher for a fund when net exposures are high, and hence a cap on it makes sense, Rishi Kohli added. However, for low-risk strategies where the net exposures are very low, the gross exposure restrictions can be increased above the current 2x limit as it would bring more strategies to the Indian market. This could initially be done for accredited investors, at least to begin with, since SEBI considers them large and sophisticated.

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