Diversify your portfolio with AIF funds that can ride various market cycles: IDFC AMC

Select AIF can go tactically and strategically either Net Long over bull markets (where Long exposures are greater than Short exposures) or Net Short over Bear markets (Short exposures exceed long exposures) for market timing gains, Vijay Krishna Kumar, Director - Liquid Alternatives, IDFC AMC, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:

A) We always find that investors react to immediate market sentiments and usually end up losing money as they try to time the market without understanding the dynamics.

In the not very recent past, both the equity market was perplexed and debt markets witnessed even bigger challenges. There was an increasing demand for a Long/Short Alternative Investment Fund like the IDFC India Equity Hedge – Tactical Fund that we recently launched that are completely uncorrelated to equity and debt indexes.

The fund helps manage the asset allocation needs of sophisticated investors for three specific reasons – firstly, to diversify away from both equity and debt. These 2 asset classes are not always inversely correlated as investors discovered last year. The objective is not to completely replace these asset classes, but merely to supplement them.

Secondly, to seek to maintain volatility protection lower than the Indian equity market in times of market stress. Typically, Long/Short AIFs run a short book and/or buy Put protection hedging against extreme market falls.

And, finally, transparency and liquidity over traditional alternatives that Indian investors are overweight in, such as, Gold. With low inflation and real positive rates (above inflation) now formally enshrined in the RBI mandate, defeating the point of its inflation hedge, why bother? And Property: that only provides opacity and Illiquidity.

A) We believe that Category 3 AIFs (i.e., Long/Short AIFs as per the traditional definition of Alternatives) are around Rs 12,000 crore currently.

This is far lower than Long/Short Funds in other geographies (including other BRICS) which typically constitute 3-5 percent of traditional AUMs.

There is a pressing need for uncorrelated Alternatives in India. We are way behind the rest of the world and believe the opportunity here is huge.

A) Subject to RBI mandated limits to invest in offshore funds, there is a considerable choice in the Alternative offerings available in Developed Markets.

From global to regional to country-specific mandates. Long/Short, Global Macro, CTAs (Commodity Trading Advisors) are some of the strategies that typically dominate global Hedge Fund allocations.

A) Well, these are completely different asset classes. Long only AIFs are comparable to long-only Mutual Funds and tend to be correlated to them. Long/Short AIFs on the other hand, run hedged equity strategies and vary in style among each other.

Within Long/Short AIFs, it is possible to further differentiate between:

Market Neutral Long/Shorts: These tend to have a Net Exposure of around 0% (where Long exposures=Short exposures) and ranges between -10% to +10%. Low volatility, seeking to outperform short term debt.

Low Net Market Neutral Long/Shorts (LNMN): Net Exposures of between -20% to +30% offering some leeway around 0%. Low volatility, seek to outperform all classes of Debt funds over a cycle.

Moderate Net Long/Shorts: Net Exposures of between +20% to +50%. Low to moderate equity net exposure seeking to make more Alpha from Longs.

Tactical Long/Shorts: Freestyle net exposures to either be tactically net long, net short, or market neutral across all market cycles. Seek to make both Stock Alpha and Market Timing Alpha.

Long-biased or Leveraged Long/Shorts: Very long-biased (i.e., Net exposures above 60%). High returns with high volatility in Bull markets.

A) Firstly, the strategy involves generating Alpha from various sub-strategies, such as Longs, Shorts, and Pairs, no matter what phase of the cycle we are in. Putting these together makes the Portfolio Alpha less correlated to markets.

Secondly, the Fund can go tactically and strategically either Net Long over Bull markets (where Long exposures are greater than Short exposures) or Net Short over Bear markets (Short exposures exceed Long exposures) for market timing gains. Of course, this is easier said than done.