Avendus Capital has announced the launch of a new Category III AIF, Avendus Enhanced Return Fund, Series II. A Category III AIF (Alternative Investment Fund) is allowed to adopt long-short strategies (profit from rising and falling markets) and use leverage (borrow to invest). This makes Category III AIFs such as this one both highly risky and potentially very rewarding. The minimum investment in an AIF is Rs 1 crore, and so it’s suited for high net worth individuals.
Avendus Capital had launched Avendus Enhanced Return Fund, Series I in December 2017. The fund had delivered 7.66% since inception till September 2018 compared to 6.74% on the Nifty in the same period.
The objective of the fund is to deliver 1.5 times the Nifty return (if positive) and limit downside to 0.3 times the Nifty return, if negative. The fund will have 70% of its assets on the ‘long side.’ In other words, 70% of its assets will be invested in select stocks to generate index-beating returns or alpha. These will be 15-20 stocks selected from the BSE 200.
These 15-20 stocks will be shortlisted by the investment team at Avendus Capital from a broader universe of 35 stocks which will in turn be culled out from the BSE 200 using a screener. The selected stocks will have equal weightage in the portfolio with a 0.5% allowed deviation on either side. Outside the broader universe of 35 stocks, the committee may add 3-4 stocks from the BSE 500 as turnaround stories or emerging themes.
In its presentation, Avendus has released backtested returns of this ‘long only’ portfolio. The back-tested calculations show a CAGR of 48.5% over three years if the best 3 year period in the past decade is chosen. If the worst 3 year period is chosen, the CAGR is 5.5%.
Apart from this 70% long-only portfolio, Avendus Enhanced Return Fund, Series II will have a 30% of its assets devoted to a ‘long-short’ strategy. Long-short means that the fund can use leverage (borrowing) and derivatives to either short-sell the market (profit when markets fall) or go long the market (profit when markets rise).
Avendus Capital has identified three market outlook situations – bullish, bearish and range-bound and will adjust the long-short section of its portfolio according to each type of market outlook. In the bearish outlook scenario, the long-short portion can have a net short position of up to 40% of the portfolio.
Avendus Enhanced Return Fund, Series II has a minimum ticket size of Rs 1 crore. It has a one time placement fee (like an entry load) up to 2% and annual management fees of 2.50%-2% depending on the amount invested. The fund is open-ended and you can exit on certain dates each month. However, the fund has an exit load of 3% for exit within 15 months of allotment.
The team managing Avendus Enhanced Return Fund, Series II will consist of the CEO, three fund managers and a supporting research team. Andrew Holland, CEO of Avendus Capital, is a well-known personality in investment circles. He previously worked at Ambit Capital, DSP Merill Lynch, Country Nat West, Barclays and Credit Suisse. Vaibhav Sanghavi, Piyush Shah and Tarun Kewalramani are the three fund managers. They have also previously worked at Ambit Capital.
Rupee IQ Take
In volatile markets such as these, hedged strategies and hedge funds sound superficially attractive. However in the long run, such funds fail to outperform plain vanilla equity mutual funds or hybrid funds. The fees and charges are also higher than equity mutual funds (the latter do not have any entry load, for instance). Although Avendus Enhanced Return Fund, Series II is only open to wealthy investors (minimum ticket size of 1 crore), it is not delivering anything special to them.