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Such a switch will give fund managers more flexibility to manage these products, which under the PMS model are usually structured to buy and hold stocks for a longer period. PMS products, meant for the rich, cannot accept investments of less than Rs 25 lakh per investor.
Once these become hedge fund products, fund managers will have far more room for implementing trading strategies, especially through futures and options. PMS providers intend to register their schemes under Category-III of the AIF, which includes funds that can use diverse trading strategies and leverage to bet on the markets.
“PMS permits the use of derivatives only for hedging purposes and not for leverage. Hence, long/short strategies could be run in a very restricted manner. Category-III AIF has now made it possible to run these long/short strategies (with leverage subject to caps and not for hedging alone),” said Prateek Pant, director, products & services, RBS Private Banking. “PMS providers who were running these strategies would seek re-registration.”
Officials at PMS providers said many schemes were looking to register under this category but none were willing to officially confirm this.
A switch to becoming a hedge fund is expected to ease the pressure on PMS equity schemes, which have underperformed their benchmarks and the markets sharply, partly because of the limited room to adjust the portfolio in line with market conditions.
“There is hardly any PMS equity product which has made money for their clients. Hopefully, the more liberal use of derivatives and leveraging will help manage risks better,” said a fund manager who manages a broking firm’s PMS equity scheme.
Leveraging refers to the process of borrowing capital and trading for higher returns. While this option has been made available by the Securities and Exchange Board of India, officials at PMS providers said there was no clarity on the extent to which the leverage could be taken.
Another reason for the proposed switch is the ease of pooling investments. Under hedge funds, the entire investment corpus is taken as one, with investors holding units of the total corpus. On the other hand, the investments are done individually in a PMS product. While investments may be pooled at a certain level for the purpose of investment, it would eventually be split into individual investments.
AIF CATEGORY-III FUNDS
What are they?
These are hedge funds which trade with a view to make short-term returns, employ complex trading strategies
What is their minimum size?
Rs 1 crore
What is their investment strategy?
They are allowed to invest using pure-play derivatives in long-short strategies, employ leverage, including investment in listed or unlisted derivatives, and are pooled investments
How are these different from PMS products?
The PMS model is usually structured to buy and hold stocks for a longer period. The use of futures and options is not permitted under PMS, except for hedging purposes. Once these products become hedge fund products, fund managers will have far more room for implementing trading strategies, especially through futures and options
