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 main Long-Short AIFs in India
There are currently only a limited number of options when it comes to long-short AIFs in India, that are managed by a few key firms.
The major long-short AIFs available in India currently include:
- Avendus AIF: Avendus Absolute Return | Avendus Enhanced Return
- ITI AIF: ITI Long-Short Equity
- ICICI Pru AIF: ICICI Pru Long-Short AIF
- Tata AIF: Tata Absolute Return | Tata Equity Plus Absolute Return
- Alta Cura AIF (Currently closed for subscription): Alta Cura AI Absolute Return Fund
Each of these firms & strategies have their own distinct pedigrees, risk-reward & investment styles, which are discussed in greater depth through this post.
Our Ranking of Long-Short AIF AMCs/Providers
Not all AMCs that run long-short AIFs have the same level of pedigree when it comes to managing long-short strategies. In our opinion, the following is the ranking we ascribe to individual providers:
- Avendus AIF (the leader): clearly the most established long-short AMC in the market, driven by the substantial experience of its core CIO team of Andrew Holland. Avendus also manages the largest pool of long-short AUM in the market, and has one of the strongest investment cum research teams to support their AIF strategies.
- ITI AIF (a worthy second place): ITI AIF is headed by Rajesh Bhatia, who comes into ITI having substantial experience managing a similar strategy at an FII. Their strategy is well-defined and they have established a track record, that clearly demonstrates lower volatility than the markets.
- Alta Cura AIF (credible new fund): Alta Cura AIF is founded by Raman Nagpal (an experienced data scientist having established investment credibility of his algos with over a decades experience at Accuracap). The strategy is well-defined, and aims to earn high absolute returns via market-neutral strategies.
- Tata AIF & ICICI Pru AIF (still to prove their credentials): Both Tata & ICICI Pru AMC have launched long-short AIFs as well. The strategy definition and performance track record are not as strongly established relative to the other 2 providers. ICICI Pru AIF does have a relatively longer-track record, but has a less experienced long-short manager. Tata AIF is very young in long-short strategies, but their fund manager does have prior experience managing long-short strategies.
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.
| Scheme | Target Net Long | Closest Hybrid MF Category |
| Avendus Market Neutral AIF | ~ 0% | Conservative Hybrid |
| Avendus Absolute Return AIF | 15% to 20% | Conservative Hybrid |
| Avendus Enhanced Return AIF | 60% to 95% | Aggressive Hybrid |
| ITI Long-Short AIF | 25% to 60% | Dynamic Asset Allocation |
| Tata Absolute Return | -20% to 35% | Dynamic Asset Allocation |
| Tata Equity Plus Absolute Return | ~25% | Equity Savings |
| ICICI Pru Long Short | undefined | unclear |
| Alta Cura Absolute Return | 0-10% | Equity Savings |
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