Derivative flexibility likely to open new product avenues for PMS

Proposals could help PMS better compete with AIFs and SIFs, say experts

The Securities and Exchange Board of India's (Sebi's) proposal to allow portfolio managers to make greater use of exchange-traded derivatives could pave the way for a wider range of investment strategies under portfolio management services (PMS).

 

According to PMS firms and wealth managers, the added flexibility would enable managers to offer products such as long-short, market-neutral and hedged equity strategies. It would also allow them to use strategies such as covered calls to generate additional income while helping manage downside risks and market exposure more effectively.

 

"This shifts derivatives from pure hedging tools to alpha-generation instruments, enabling products like long-short equity strategies, covered-call/put-write income overlays, tactical leveraged equity plays, and volatility-hedged portfolios," said Arun Prakash, executive director, Listed Investments, Waterfield Advisors.

 

In a consultation paper released last week, Sebi proposed allowing portfolio managers to take total exchange-traded derivative exposure of up to 125 per cent of a client's portfolio, including unhedged short positions of up to 50 per cent and option premium exposure of up to 10 per cent. Currently, portfolio managers can use derivatives primarily for hedging and efficient portfolio management.

 

"The changes can open up opportunities for long-short and market-neutral strategies, hedged equity portfolios, covered-call strategies, global allocations, and other differentiated products. It will also allow managers to manage downside risk and market exposure more efficiently," said Pawan Kumar, managing director and chief investment officer, Neo Wealth Management.

 

Manish Bhandari, chief executive officer and portfolio manager, Vallum Capital, also said that the proposals, if implemented, would pave the way for differentiated offerings such as covered-call overlays, protective puts, and market-neutral strategies. The additional derivative flexibility, he said, would enable portfolio managers to design products that are currently unavailable to investors through any of the asset management structures.

 

PMS players and wealth managers believe the flexibility on derivatives, coupled with the proposed expansion of the investment universe to include foreign securities and to-be-listed securities, would make PMS more competitive with Category III Alternative Investment Funds (AIFs) and Specialised Investment Funds (SIFs), which currently offer a wider range of sophisticated investment strategies.

 

"The proposed changes would enable PMSs to compete on a more level playing field with AIFs and SIFs. They will also enhance product innovation, create new avenues for business growth, and broaden the appeal of the PMS model," said Karan Aggarwal, co-founder and chief investment officer, Ametra PMS.

 

"If executed properly, it will allow PMS to offer the kind of bespoke, risk-budgeted products that used to exist only in offshore hedge funds or Category III AIFs," said Sanjeev Sadanand Patkar, chief investment officer, FYERS Assets.

 

According to Sandeep Jethwani, co-founder of Dezerv, while sophisticated derivative strategies may still be better suited to the SIF route, the inclusion of global investments, unlisted debt, and to-be-listed securities creates an opportunity for portfolio managers to offer more comprehensive wealth solutions.

 

"Derivatives are better executed through the SIF route. That said, the consultation paper does throw open some possibilities for managers who prefer to use derivatives more actively, including for hedging purposes. These proposed changes open up the possibility of portfolio managers becoming comprehensive wealth managers," he said.