As market rally begins to run out of steam and concerns about valuation and the rupee mount, investment firms are turning from plain vanilla buy and hold strategies to more exotic long-and-short ones. Franklin Templeton Alternative Investments is launching a category III Alternative Investment Fund (AIF). The fund will be called the Franklin India Long Short Equity AIF. Long Short means that the fund can make money from rising stock prices (going long) and falling stock prices (going short). Ordinary mutual funds can only make money from rising stock prices (going long).
What is an AIF?
An Alternative Investment Fund or AIF is a type of fund which invests in unlisted companies (private equity) or does short-term trades in the equity market (hedge fund). The minimum investment in AIFs has been set at Rs 1 crore (however up to two members of a family as defined by the AIF regulations can invest jointly eg: Rs 50 lakh each). An AIF cannot have more than 1,000 investors. However, each scheme must have a corpus of at least Rs 20 crore.
The categories of AIFs (as laid down by SEBI) are:
1) Category I: Funds investing in the social sector or small and medium enterprises or some other activity, specifically encouraged by the government. They are close ended funds and must have a minimum tenure of three years. They cannot invest more than 25% of their corpus in a single company.
2) Category II: Funds investing in any other activity without leverage (borrowing). Eg: Private Equity Fund. They are close ended funds and must have a minimum tenure of three years and cannot invest more than 25% of their corpus in a single company.
3) Category III: Funds trading in the markets in the short term with leverage. Eg: Hedge Fund. However, SEBI limits this to twice the NAV of the fund.
What will Franklin Templeton Long Short AIF do?
The fund strategy is to deliver absolute returns of gross 18-20% across market cycles by taking long and short positions in the equity markets, with less volatility than the overall stock market using combinations of fundamental, technical and quantitative analyses in order to determine long /short investment ideas. The fund will have an open-ended structure, but an investment horizon of at least 12 months has been recommended. Investors can redeem on the last day of each month but with a 7-day notice. The Franklin Alternative Investments team is led by Sundaresan Nagnath who has previously been President and Chief Investment Officer (CIO) at DSP Blackrock and has been a portfolio manager, at Credit Suisse.
|Ideal Investment Horizon||At least 12 months|
|Gross & Net Exposure||In the Long-Short Fund, the exposure range maintained by the team was – Gross exposure: 50-110%, Net exposure: 10-50%|
|Universe for Long & Short positions||Top 200 stocks by market capitalization|
|Fee Structure*||Rs. 1 cr < 5 cr – 1.75%
Rs 5 cr < 10 cr – 1.25%
Rs 10 cr < 50 cr – 1%
Rs 50 cr and above – 0.60%
|Exit Load||0.25% upto 3 months|
|Valuation Frequency||Monthly, on the 3rd business day. Valuation update will be sent on 4th business day|
|Investment Date||Once a Month, on the last business day of the month for notices received 5 business days prior subscription. (T – 5 days.)|
|Redemption Date||Once a Month, on the last business day of the month with a notice period of 7 business days. (T – 7 days.)|
|Redemption Payout||( T + 5 days) Max|
Note: The fund will also charge a performance fee of 20% (in other words, 20% of the profits made), every fiscal year. However, the fund needs to make a profit of at least 10% in order to charge this fee (called hurdle rate).
Under Section 161 (1A) of the Income Tax Act, 1961, the fund will pay tax on its profits at a rate of 35.88% (profits from business and profession). If it makes capital gains/losses, it will pay tax at the applicable rate (short-term capital gains at 15% and long-term capital gains at 10%). Since the fund is already paying all the applicable tax, investors may not be liable for the same. However, as an investor, you may need to seek advice from a CA to understand the exact tax implications of the fund’s profits.
Should you invest?
AIFs are the playground of the high net worth individuals (HNIs). Remember that the minimum investment is Rs 1 crore. Category III AIFs can take leverage up to twice their size (borrow to invest) which makes them the riskiest type of AIF. However, Franklin Templeton has a rock-solid reputation in the world of investment management and their team will know what it’s doing. If you have a surplus investible corpus of well beyond a few crores and are willing to take high risk for potentially high returns, this may be considered to invest.