Alternative Investment FundIDFC Asset Management Company (AMC) has announced the launch of IDFC India Equity Hedge – Tactical Fund, an AIF (Alternative Investment Fund) Category III offering. The company says the fund will follow a Tactical Long / Short Equity strategy and target annualised returns comparable to those from equity funds with the potential to generate those returns across bull and bear market cycles alike. The fund will have significantly higher net exposures, typically ranging between -40% to +120%, to have higher participation in equity market movements on both sides. RupeeIQ brings you the key details. We also spoke with IDFC AMC’s Vijay Krishna Kumar, Director – Liquid Alternatives to decode the product for AIF investors. Read on.

Fund objective

IDFC India Equity Hedge – Tactical Fund seeks to generate high absolute and uncorrelated returns from Indian equity markets while maintaining volatility lower than the Indian equity market.

Being an AIF Category 3 offering, the fund will have a minimum Rs 1 crore investment requirement suitable for Ultra High Net Worth Individuals, Family offices, Corporations, and Institutions.

Investment strategy

The fund wants to use cash equities and equity derivatives to create alpha generating sub-strategies. It wants to have the flexibility of being Net Long or Net short depending on the investment view. The four sub-strategies to be employed include Long exposures, Short exposures, Market Neutral exposures, and Yield enhancement strategies. The number of stocks/securities in the fund portfolio will vary from anywhere between 30-65 positions typically across its 4 sub-strategies.

Fund return and volatility

IDFC India Equity Hedge Tactical Fund endeavours to deliver a return profile that will be comparable to equities, but it aims to deliver positive returns in bear and volatile markets as well. With the current market volatility, investors are looking for a fund that can provide absolute returns irrespective of the market cycle or how the interest rates are moving.

Such AIFs may deliver 20% plus annualised gross target return, but do remember there is no assurance and guarantee as to the returns or performance, and the actual returns would depend on market conditions. There are funds who have not been able to deliver positive returns in these markets in the last few months.

Fund terms

Minimum subscription – Rs 1 Crore

Capital contribution – 100% upfront

Subscription – Monthly

Redemption – Monthly

Lock up period – None

NAV Frequency – Monthly

Details of the fund fee structure

Placement fees – Up to 2%

Management fees – Up to 2.5%

Performance fees – 20%

Exit Load – 1% for 1 year

Other fees – Up to 1%

Hurdle Rate – 12% (pre tax)

Fund management team details

The fund will be managed by IDFC AMC’s Vijay Krishna Kumar, Director- Liquid Alternatives, an early pioneer in Indian Long / Short investing with a 12-year track record and a total investment experience of 19 years. The investment team will include a Forensic Research Analyst, specialising in deep-dive research into company accounts, valuation modelling and identifying key drivers for long and short alpha and an Algorithmic Quantitative Trader, looking into securities dealing, position monitoring, and risk management.

Vijay was earlier director of Mumbai based Gulmohar Alpha Capital Advisors and Senior Portfolio Manager of Swiss-based multi-manager SteppenWolf Capital LLC. He was formerly CIO and Portfolio Manager for The Chatterjee Group’s public equities division (TCG, a Soros spinoff). During his tenure, TCG IndiaStar was top 2 ranked by EurekaHedge in its peer group. He also was former Co-CIO of the AGRA India Fund (PCE Investors, London), seeded by New Alpha Advisers, a consortium of blue-chip European insurance companies.

Vikas Nagar is the forensic research analyst. Vikas’s previous work experience was with HDFC Securities and Motilal Oswal Securities in Forensic Accounting research.

Jill Shah is the dealer and quantitative trader. Jill’s previous work experience was in Algorithmic trading at Dolat Capital.

RupeeIQ spoke to fund manager Vijay Krishna Kumar. Excerpts:

Can you tell us about how you will be ‘Net Long’ or ‘Net short’?

We will take ‘Net Long’ or ‘Net Short’ positions through a combination of cash and futures longs, single stock futures shorts and options. Our net exposure (net long or net short) will be a synthesis of bottom-up, mostly value-driven ideas within our opportunity set, with a top-down macro overlay.

What is the role of forensic research analysis in this fund? How will the fund use the analysis?

We believe it is crucial to completely understand the companies we take positions in, whatever they may be, long, short or pair ideas. Especially in the increasingly challenging macro and regulatory environment, we are facing. To this endeavour, we dive deep beyond the published financials to uncover aggressive accounting practices, related party transactions, uses of cash, financing structures (ALM mismatches for financials), and shareholder value creation to understand how best to value the company. Unless we can establish a margin of safety to the current price, we do not take a position.

What is the Exit Strategy from an investment?

Our portfolio is liquid and can be unwound fairly quickly. Exits on individual positions are a function of the Ex-Ante Alphas (margin of safety) vs unit of risk, money management rules and top-down macro or sector driven.

Any market cap tilt in the fund or you would be simply opportunistic?

Generally, portfolios will be mostly Large and Large-Mid Cap invested, to avoid beta consolidation risk. The portfolio can invest up to 20% in Small Caps, but the manager is not convinced we are at a bottom yet.

What is the USP of IDFC India Equity Hedge Tactical Fund compared to other long-short AIFs in India at present?

We do not comment on other managers. We would urge investors and AIF allocators to conduct their own due diligence on managers, and their audited track records in managing their strategies. From our end, our manager has a demonstrable audited track record in India focused Long/Short strategies since 2006, managing European and US institutional capital amongst others. The combined track record from previous tenures of the manager managing a similar Tactical strategy has demonstrated completely market uncorrelated returns. Furthermore, on average when indices have been negative, the combined track record has demonstrated positive returns on average. We naturally make no assurances going forward.

Fund taxation

AIF Category III is a Non-pass-through vehicle. Hence, tax liabilities are to be discharged at the fund level.

The fund will claim all permissible expense deductions and shall pay tax at a maximum marginal rate under the head as business income.

Upon redemption, all proceeds to the investor shall be paid post discharging the tax liabilities by the fund. Hence, the redemption proceeds should be tax-free in the hands of the investor.

As the fund vehicle is a taxable entity, the tax is paid under the PAN of the Fund and NOT under the PAN of the investor. The tax paid shall not be reflected in 26 AS statement of the investor as the tax payment is done under the PAN of the fund.

The statement of account issued at the time of redemption shall confirm that the tax on this investment is paid at the fund level (Quoting Funds PAN) and post-tax proceeds, are paid out to the investors

Previous offerings

IDFC AMC’s first AIF Category III offering, IDFC India Equity Hedge Conservative Fund, launched in January 2018 follows a Low Net/Market Neutral risk framework in keeping with its conservative character.

The new fund, IDFC India Equity Hedge Tactical Fund, will have similar underlying strategies but higher net exposures to better capture equity market movements both on the long and the short side.

The first product, IDFC IEH Conservative Fund offered an alternative to various fixed income strategies while the IDFC IEH Tactical Fund will offer an alternative to Equity-oriented strategies.

RupeeIQ take – The aim of this alternative fund is to give more diversification and low correlation to existing traditional investments. They are not meant to replace traditional investments. Rich investors can use IDFC India Equity Hedge Tactical Fund to add value to your asset allocation mix.

Disclaimer – Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on contact@rupeeiq.com