Comparison & Review of Top Long-Short AIFs in India

Understanding Long-Short Strategies

Equity Funds vs Long-Short Funds

Most equity funds are long-only - they buy stocks and benefit when stock prices move up. Accordingly, equity funds can typically only deliver positive returns in bullish market conditions when stock price are moving up, and deliver negative returns in bearish markets when stock prices fall.

Long-short funds have the ability to short stocks (take a sale, instead of a buy position in a stock, via either future or option contracts). When you short a stock, you benefit when the stock price falls, and lose when the stock price rises. This gives fund managers of long-short funds, the ability to generate a positive return even in bearish market conditions when stock prices are falling.

AIFs that follow a long-short strategy, invest in a combination of long positions (via either equity shares or equity derivatives) and short positions (taking a short or selling position in a stock, via equity derivatives). The broad aim is to go long stocks that are expected to move up, and short stocks that are expected to move down. 

Long-short funds typically have a lower net-exposure (gross long minus gross short) to equities, and accordingly are in a position to deliver returns with substantially lower volatility than pure equity funds. 

Most long-short funds use sophisticated trading strategies involving futures & options, which allow them to construct trades that can lead to payoffs in very specific types of market conditions that they expect to unfold.

Types of Long-Short Funds

There are many different types of long-short funds, that are structured differently in terms of the amount of long (buy) and short (sale) positions that they can enter into. This includes

• Market-Neutral/Absolute Return Long-Short Funds (similar to conservative hybrid funds): Funds that seek to maintain close to a zero net-long position (i.e. they try to maintain a similar amount of long & short positions). These funds try to generate a small-positive return every month, regardless of market conditions.

• Long-biased long-Short Funds (similar to dynamic asset allocation or aggressive hybrid funds): Funds that typically have a 65%+ net-long position in the markets, but who can use shorting to reduce equity exposures in bearish market conditions to rescue the extent to which portfolios decline when markets fall.

• Pure Hedge Funds (limited options in India): Funds that seek to be net-long in bullish markets and net-short in bearish market conditions, with an aim on making positive returns across all types of market conditions. If a fund manager gets his calls right, this can lead to a fund making large positive gains even in large bearish markets (assuming the fund manager maintained a net short position through the declines).

The Top Absolute-Return Long-Short Funds in India

The Top Long-biased Long-Short Funds in India

The Risk-Reward of leading Long-Short AIFs

Each long-short strategy has their own unique investment philosophy and manner of working, which leads to substantial differences in terms of the risk-reward. In this section, we compare the risk-reward of different strategies to the nearest traditional hybrid MF category, based on their defined/historical net-long exposures.