Long-only AIFs outperform long/short peers, give median returns of 3.4%

Funds which bet on the market going up outperformed those which also profit from falling markets last month.  

Category III Alternative Investment Funds (AIFs) include hedge funds which use complex trading strategies or use leverage to increase returns. They are for the very wealthy and typically involve a minimum investment of at least Rs 1 crore. This is twice the limit for portfolio management service (PMS) providers. Some of these AIFs follow an investment strategy of making money when the markets go up. These are called long-only funds. Those which can also bet on downsides are called long/short funds.

Long-only funds gave median returns of 3.24 per cent, shows an analysis of returns from 31 funds from industry tracker PMS Bazaar. Long/short funds (of which data is available for 13) gave median returns of 2.73 per cent. The August returns come during a month when the S&P BSE Sensex hit all-time highs, ending up 9.4 per cent.

This performance gains significance in light of subsequent gains. The S&P BSE Sensex touched 59,737.32 on September 17, another all-time high. Some have called for caution as markets rise.  

“With valuations peaking, we expect a tactical market correction,” said a September 16, India Flow Trails report from global broking and financial major Bank of America. The report pointed to an earlier index target which suggests a decline of nearly 17 per cent from current market levels. The report suggested that the industrial sector could continue to do well. A multi-year capital expenditure cycle is expected to benefit the segment. Financials were also expected to do well, according to the report authored by research analyst Amish Shah.

A large number of new companies soaking up liquidity is expected to be one of the risks to watch, according to a strategy report (September 16) from Jefferies India, the local arm of the global broking and financial group.

It noted that there have been $12 billion worth of shares sold by companies so far in the current financial year. The foreign portfolio investment (FPI) since March 2021 has only been $0.6 billion noted the report. It estimated that a record of over 160 new companies could hit the market this year.

“Given even higher equity supply anticipated…(in the second half compared to the first)…FPI flow uptick will become important for market performance,” said the report authored by equity analysts Mahesh Nandurkar and Abhinav Sinha.

Such risks could act as a tailwind for long/short funds. Research has shown that funds which have the ability to bet on market downsides have an advantage.

“Theory suggests that long/short (L/S) equity hedge funds' returns come from directional as well as spread bets on the stock market…. non-factor related returns, or alpha, are positively correlated to market activity and negatively correlated to aggregate short interest,” said a September 2011 work from authors William Fung and David A Hsieh published in the Journal of Empirical Finance.

“Expressed differently, L/S equity hedge funds, as the name suggests, do benefit from shorting. Besides differences in risk taking behavior, this is a key feature distinguishing L/S funds from long-bias funds,” it added.

Source: PMS Bazaar, Business Standard calculations | Note: Based on 31 long-only funds and 13 long/short funds for which data is available