It’s raining long-shorts in Mumbai, with Edelweiss, SBI MF and Quant AMC having launched their own versions under the Special Investment Funds (SIFs) category, bringing hedge-style strategies into the regulated mutual fund space, and expanding investors' choices beyond Alternative Investment Funds (AIFs).
How the Strategy Works
Long–short strategies - staple for AIFs - take long positions in stocks expected to rise and short those likely to fall, aiming to smoothen out returns as against pure equity exposure. PMS Bazaar data has shown that over the past one year, these long–short bets have delivered an average return of 4.22% even when the benchmarks fell. However, the medium to longer term record is mixed, as five-year returns averaged 13.52% compared with 20.33% for the BSE 500 TRI. Since inception, the category has delivered a return of only 12.20%, trailing its long-only peers.
Investor Objectives
Dharmendra Jain, co-founder of Ionic Wealth, has cautioned against direct benchmark comparisons, noting that long–short products serve different purposes. Some target conservative positioning similar to fixed income, while others pursue equity-like returns with lower volatility. Jain said fixed income-oriented strategies have gained traction as falling interest rates and mutual fund tax changes have boosted post-tax returns to 6.5-8%.
PMS Bazaar’s R Pallavarajan said that these products are often structured as conservative alternatives to arbitrage or debt funds. With leverage, the target is 7-12% post-tax returns, mainly appealing to institutions. “Even after a maximum tax rate of over 40%, achieving 7-8% with very conservative, low-standard-deviation strategies makes sense for institutional investors,” he said.
High-networth individuals are also a key base, with Rajan of PMS Bazaar adding that allocations are shifting from liquid and arbitrage funds, with even small exposures helping cut overall portfolio volatility. “While isolated returns may seem modest, the inclusion in a broader portfolio adds substantial value, which is why wealth managers position this product for HNIs,” he said.
The Risks
While there are risks with long-short investing, as observed by Nitin Pagar, the head of investor relations at Nubra.io who said that absolute return funds are gaining global traction with long-short as a popular strategy, India is less structurally suited since naked short selling is banned here and most shorts are executed via futures with position limits.
“The risks are equally significant. A wrong call on the short leg can erode alpha even if the broader market moves higher, making manager discretion absolutely critical,” Nitin Pagar said. Globally, long-short portfolios diversify across geographies and asset classes, but in India, the scope is narrower, focused on stocks and indices.
SIFs vs AIFs
This shift to SIFs is designed to widen access to opportunities for better returns. Equity SIFs must invest at least 80% in equities, debt SIFs in debt, and hybrid SIFs at least 25% in each, with short exposure capped at 25%. The minimum ticket is ₹10 lakh versus ₹1 crore for AIFs, while expense ratios are capped at 2.25%.
Jain said SIFs - with 100% gross exposure - could enhance risk-adjusted returns, though they remain more limited than AIFs, which allow 200% exposure and greater shorting flexibility. SIFs also offer standardized fees and public reporting while AIFs provide fee flexibility but limited transparency.
Taxation could tilt the balance between the two, as according to PMS Bazaar’s Pallavarajan, SIFs enjoy mutual fund-like taxation at the investor level, unlike AIFs, where returns are taxed at the maximum marginal rate unless investor details are disclosed. Experts expect the two categories to remain distinct, with adoption hinging on whether SIFs can match or exceed AIFs in returns, tax efficiency and accessibility.
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