Assets of AIF industry grow 42% in the past year, shows Sebi data

The assets of alternative investment funds (AIF) touched Rs 6.41 trillion at the end of the January-March quarter, a growth of 5.2 per cent over the previous quarter, reveals the Securities and Exchange Board of India (Sebi) data.

Assets of the AIF industry have grown 42 per cent in the past year, as an increasing number of wealthy investors turned to such funds to derisk their portfolios and maximise returns. The industry has grown more than 7x in the past five years, from assets of Rs 80,000 crore.

AIFs have a minimum ticket size of Rs 1 crore and aim to offer investors access to sophisticated strategies across different asset classes.

Discerning investors, who have seen multiple market cycles, have exposure to different asset categories — both globally and domestically — and through different investment vehicles, need a more customised approach that allows them to invest according to their individual risk and return profile.

Given the rich valuations in the listed space, investors are looking at alternatives, such as structured credit, venture capital, private equity (PE) and real estate funds, and long-short strategies in Category III, all of which may have little correlation with long equities, said experts.

 

According to the Indian Association of Alternative Investment Funds, with sophisticated investors looking beyond traditional retail-oriented investments, AIFs are expected to potentially witness 3x growth over the next five years and surpass Rs 1.7 trillion assets under management.

AIFs offer risk-return combinations and flexibility with professional management that other vehicles like mutual funds (MFs) or portfolio management services (PMS) or direct investment cannot offer. The last few years has also seen star fund managers from the MF industry set out on their own to manage AIFs.

According to Tejesh Chitlangi, senior partner, IC Universal Legal, category III AIFs, despite not having a conducive tax regime and whilst facing a relatively higher degree of regulatory supervision from Sebi compared to other categories, have still achieved significant success and witnessed some path-breaking structures and funds.

“These are indicators of resilience and affirm that the industry is set for exponential growth in the coming years,” he said. 

The assets of Category II funds form 80 per cent of the total AIF industry. Funds which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements are classified as Category II. 

These include real estate and PE funds, and funds of distressed assets.

Category III AIFs include hedge funds that employ complex trading strategies or use leverage to increase returns. Long-short funds employ a dual strategy to make returns — buy stocks that are expected to appreciate and short or sell stocks that are expected to fall.

Long-only AIFs outperformed long-short funds in 2021-22. The former gave an average category returns of 30.6 per cent, against the latter’s 13.6 per cent, shows the data from PMS Bazaar.

Twenty-five of the 32 long-only funds managed to beat the Nifty50 return of 18.8 per cent during the year, while only two of the 12 long-short strategies were able to beat the benchmark. 

As PMS and AIF products generate healthy returns, achieve better penetration and thrive in a favourable regulatory landscape, the industry is expected to cross Rs 50 trillion on the back of 20 per cent compound annual growth rate by 2031, according to PMS Bazaar.

Break-neck growth notwithstanding, the AIF industry is still one-sixth the size of the MF industry, which had assets of Rs 37.7 trillion at the end of March 2022.