Long-short funds are a relatively new addition to the Indian asset management landscape, but they have grown in popularity with an estimated 35 managers having launched long-short Category III AIFs in the past seven years. Prominent players such as Edelweiss, Avendus, DSP, Franklin Templeton, ICICI, IDFC & Tata manage an estimated 12,000cr in long-short funds. In this article, we explain how the investment flexibility of long-short funds can offer a better client experience than traditional equity portfolios.
Equity mutual funds are increasingly being tethered to well defined boxes by SEBI. This is a sensible move for a mass retail product, where standardization & ease of comparison among peers is important. For example, AMCs are restricted to having a single open-ended offering in each of the 9 traditional active equity and 6 hybrid categories respectively. And the asset allocation of these offerings is tightly controlled with an AMFI defined list of large, mid and small cap stocks. For example, a large cap fund must have at least 80% of its AUM in large cap stocks, which are in turn defined as the top 100 companies by full market capitalization. These tight restrictions along with the adoption of total return indices for benchmarking in 2018 has led to shrinking alpha for mutual fund portfolios. In the last two years, we have seen an extreme polarization of equity performance with a handful of large cap stocks contributing to the entire 7.5% rise in the NIFTY, while the CNX Midcap index has fallen -10.0% in the same period. This cyclical phenomenon has exacerbated the shrinking alpha problem – and even though this will reverse at some point, the structural impediments are still there.
Mr. Nalin Moniz is the CIO – Alternative Equity of Edelweiss Asset Management Limited (EAML) and the views expressed above are his own.