Assets of alternative investment funds cross Rs 6 trillion in 2021

The assets of alternative investment funds (AIFs) crossed the Rs 6 trillion-mark for the first time as an increasing number of wealthy investors scout for alternatives to de-risk their portfolios and maximise returns.

Assets of the AIF industry stood at Rs 6.1 trillion at the end of the December quarter, a 38 per cent rise over the corresponding period the previous year. The industry has grown more than eight times in the past five years from assets of Rs 0.7 trillion.

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

“AIFs are able to fulfill the customisation need of large family offices, ultra high networth individuals and other institutional investors very well,” said Yogesh Thakkar, co-head, business development, Karma Capital.

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

“Large investors are recognising the value add that the alternative platforms like PMS and AIF are providing over traditional vehicles and some allocation is coming here. The growth trend is expected to continue as the performance track record by players in this space stands out,” said Prateek Agrawal, business head and CIO, ASK Investment Managers.

He added that the AIF space has the ability to bring in long-term investors and allow the fund manager to take a long-term view. “New entrants, many of them managers with good long track records, are further helping growth of the asset class,” he said.
The assets of category II funds form 80 per cent of the total AIF industry. Funds that 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 funds, private equity funds and funds of distressed assets.

Thirty of the 31 long-only category-III AIFs beat the Nifty50 in 2021. These funds provided average returns of 46.3 per cent against the 24.1 per cent clocked by the Nifty, data from PMS Bazaar showed. Only two out of the 11 long-short strategies, however, outperformed the benchmark with average returns of 16.9 per cent.

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.

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 CAGR growth by 2031, according to PMS Bazaar.

Despite the breakneck growth, 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 December, a growth of 21 per cent over the previous year.