Investors seek to curb downside, with volatility hitting long-only products

In March, the ITI Long Short Equity Fund was down 0.48 per cent, as against Nifty's correction of 23.25 per cent

The sharp hit on returns from long-only products in portfolio management services (PMSes) and equity mutual funds (MFs) has prompted high net-worth investors (HNIs) to direct part of their allocations to long-short strategies to protect downside and optimise their portfolio returns.

“HNIs and family offices are looking for options where they can protect their capital in the prevailing volatile environment,” said Rajesh Bhatia, managing director and chief investment officer, ITI Long Short Equity Fund.

In March, ITI Long Short Equity Fund was down 0.48 per cent, as against the Nifty’s correction of 23.25 per cent.   

According to the data available, long-short funds -- those positioned as equity-plus return funds -- on an average have given negative returns of 12.84 per cent in March, mitigating the impact of the deep correction seen in the equity markets.  “A long-short strategy majorly invests in domestic equity and equity derivatives for the medium to long term. A fund manager takes long positions on stocks, which are expected to see a run-up in prices and takes short positions on stocks where he/she expects correction because of over-valuation or any other factor,” said Ritika Farma, head of sales and client relations, PMS AIF World.

 

 

“Investors are looking at such funds as a lower downside in a bear market can help fund manager to re-deploy the conserved capital to re-enter equities at beaten-down valuations,” Bhatia added.

“We have also seen good traction for Edelweiss Alternative Equity Scheme, as investors recognise that in an uncertain environment, there are opportunities to gain from winners and also profit from pain points that we are seeing playing out,” said Nalin Moniz, chief investment officer, alternative equity at Edelweiss Global Asset Management.

“We have been building short positions in weaker businesses, and in the current environment, such businesses have borne the brunt of the cornavirus outbreak,” he added.  However, experts say investors need to cautious of which long-short funds they are looking at. “While HNI clients have been disappointed with the performance of various equity products amid the recent market volatility, long-short funds may not work in all cases, unless the strategy is executed efficiently,” said the head of investments at a wealth management firm. According to experts, investors can also consider other strategies besides long-short, as market valuations have already seen a sharp correction.

“Investors can consider deploying funds into long-only strategies in a staggered manner, given the ongoing fall in valuations in recent weeks. Long-short funds may face challenges on account of option pricing, which may not be favourable given the high implied volatility,” said Rajesh Cheruvu, chief investment officer, Validus Wealth.

“Further, investors need to be wary of the leverage in long-short funds, given the liquidity crunch and credit events that non-banking lenders are facing,” he said.  

The alternative investment fund platform — under which long-short strategies operate — is relatively new in India, with Sebi laying down the AIF regulations in 2012. The regulations also allow long-short AIFs to take leverage for investments.