India’s hedge fund managers post widely diverging returns as strategies split on valuation and risk

India’s hedge fund managers post widely diverging returns as strategies split on valuation and risk

The median FY25 return for equity-focused Category-III AIFs was 26%, but top quartile performers delivered over 40%, while the bottom quartile trailed at just 5%, concluded from the findings of a new report by the Indian Venture and Alternate Capital Association (IVCA). The data highlights just how dependent outcomes are on manager skill and strategy in a market increasingly split between conviction bulls and cautious realists.

That divide was on full display at IVCA’s latest summit on Category-III AIFs, where long-only believers and long-short tacticians locked horns over whether India remains a buy at current valuations.

While Carnelian’s Vikas Khemani argued that Indian markets remain reasonably priced — perhaps even cheap — when seen through the lens of growth and cost of capital defending his strategy of remaining fully invested, Siddhartha Bhaiya of Aequitas rebutted saying the Magnificent Seven (in the US) are cheaper than 80% of the Nifty 500 companies.

Bhavin Shah of Sameeksha Capital acknowledged that small- and mid-cap valuations have “run ahead of fundamentals” even as Ganeshram of Avendus buttressed the point flagging a steady downward revision in FY26 earnings growth for the BSE 500 from the “late teens” a year ago to single digits now.

For FY25 (data calculated from Jan till June), the best Category-III AIF – 2Point2 Capital delivered a return of 24.04%. The worst performer was Wryght Research and Capital with a return of -24.77% during the same period. The former commands an AUM of Rs 1,683 crore while later controls assets worth above Rs 74 crore.

The IVCA report showed Cat-III AIFs managing about Rs 2 trillion in assets as of March 2025, up 28% year-on-year, with over 50% of all new AIF flows headed into the category. Equity strategies accounted for 54% of assets, while multi-asset and debt-oriented strategies gained traction.

Over the past five years, the segment has grown at a 36% CAGR with NRIs contributing 54% of the incremental capital last year, reflecting strong offshore interest in India's long-short and absolute-return vehicles.

India’s Cat-III AIF industry has become one of the fastest-growing alternative investment segments in Asia, with a structurally different mix — a heavier tilt towards long-short equity and absolute-return models. If current momentum continues, CAT III AIF commitments could reach Rs 7.5 lakh crore in the next three years, mentions the report. That design gives managers tools to ride both upswings and downturns — but it also means performance can vary widely, depending on how well they time the cycle.

As Bhaiya put it during the summit: “In an earnings-led market, you’re rewarded for your stock picks. But in a sentiment-led rally, discipline can be mistaken for underperformance.”

The dispersion in returns — and philosophies — is forcing allocators to think harder about manager selection. In a market where flows, valuations, and volatility are pulling in different directions, picking the right strategy may matter more than ever, investment advisors say.