‘Not an either-or’: Fund managers say SIFs and Category III AIFs play distinct roles

The comments come as SIFs, introduced by Securities and Exchange Board of India, begin to gain traction as a new investment category aimed at offering controlled access to long–short strategies within a tighter regulatory framework than hedge-fund-style vehicles.

• SIFs provide unique risk-return profiles compared to Category III AIFs.
• SIFs permit limited short positions, unlike mutual funds.
• Investors should evaluate SIFs' risk and portfolio structure

Did our AI summary help?

As India’s alternative investment landscape expands with the introduction of Specialised Investment Funds (SIFs), fund managers say the new category is meant to complement and not compete with existing Category III alternative investment funds, offering investors differentiated risk and return profiles within portfolios.

“It’s not an either-or choice between SIFs and Category III AIFs. Both serve different risk and return requirements within a portfolio,” Vaibhav Sanghavi. CEO, ASK Hedge Solutions said at Crystal Gazing Summit organised by Wealth Services Firm, PMS AIF WORLD on February 27. “SIFs are rightly constrained because they are closer to a retail product, while AIF Category III offers far greater flexibility in terms of leverage and net short exposure," he added.

The comments come as SIFs, introduced by Securities and Exchange Board of India, begin to gain traction as a new investment category aimed at offering controlled access to long–short strategies within a tighter regulatory framework than hedge-fund-style vehicles.

Suraj Nanda, Fund Manager - Equity and Hybrid SIF at Tata Mutual Fund added that traditional mutual funds are structurally limited by their long-only nature, which leaves investors exposed during weak or sideways market phases. “A mutual fund is generally a long-only product. Equity levels remain similar across market valuations, which is why drawdowns tend to be high when markets are sideways or bearish,” he said. “In SIFs, equity exposure can be reduced when valuations are expensive and increased when valuations are cheap, which helps manage volatility much better," Nanda added.

He noted that this shifts the burden of market timing away from investors. “Even if an investor enters at the top of the market, the net equity exposure in an SIF could be very low. The risk is managed by the fund manager, not by the investor,” Nanda said.

Harsh Agarwal, President - SIFs at 360 ONE Asset Management said the ability to take limited short positions marks the key structural difference between SIFs and traditional mutual funds. “SIFs are long–short products where overall exposure cannot exceed 100%, so there is no leverage, but they can still take up to 25% short positions,” he said.  Agarwal added that this allows funds to generate returns not just from stocks going up, but also from stocks and sectors that are going down.

He said this becomes particularly relevant during periods of sharp stock-level divergence. “You can see stocks rising 30–40% and others falling 20% while the index remains largely flat. A well-run SIF should be able to capture opportunities on both sides,” Harsh said.

On risk assessment, Agarwal said investors should focus on beta as a simple indicator of market sensitivity. “Beta tells you how sensitive a fund is to market movements. If the market falls 10% and the fund falls 4%, you immediately understand the risk positioning,” he said.

Sanghavi said Category III AIFs continue to play a distinct role for sophisticated investors, particularly in volatile or sharply bearish markets. “Category III AIFs allow much higher flexibility in leverage and the ability to go meaningfully net short, which may not be possible within the SIF framework,” he said.

However, he cautioned that while not all hedge-fund strategies are portable into SIFs, the underlying investment skill remains transferable. “Not everything is portable into an SIF, but the skill of managing long–short strategies across market cycles definitely is,” Sanghavi said.

Fund managers also noted that SIF offerings can vary widely in positioning, from conservative hybrid strategies to aggressive equity long–short funds, making it essential for investors to look beyond category labels and assess portfolio construction and risk metrics carefully.

PMS AIF WORLD is India’s leading wealth services firm specialising in alternative investments, serving over 800 clients across Rs 2,200 crore in PMS and AIF assets. The firm follows a knowledge-first philosophy with the belief that when knowledge leads, wealth follows, and it focuses on delivering well-informed investing for its alpha seeking clientele.