ALT NEWS June 30, 2016
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Second Edition
Alt smart is India’s first and only exclusive web portal for information on “Alternative investment funds” (AIFs) In the last edition we gave an introduction about alternative investment funds. Now, we will brief you on the various kinds of funds available. Types of AIF They are classified in 3 categories Category 1: They are funds which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors OR areas which the Government or regulators consider as socially or economically desirable. Category 2: They are funds like private equity and venture capital funds, debt funds, and Real estate funds etc. which do not fall in Category 1 and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements. Category 3: They are popularly known as “Hedge funds” they employ diverse or complex trading strategies and may employ leverage/borrowing. They invest in listed/unlisted securities which may be stocks, bonds, foreign currencies, interest rate products as well as any listed/unlisted derivatives Tax benefits Funds in both categories 1 and 2 enjoy a “pass-through” status which means that all income received from investment in such funds is added to the investor’s income for the purpose of taxation. Investment duration Category 1 and 2 funds generally have a time frame varying from 2 years and even up to 10 years. They are closed ended and are not listed on any exchange. Hence liquidity for investors is zero. They have to remain invested for the entire duration of the fund. Category 3 funds can be either open-ended OR closed-ended and can vary from 1 year to 10 years. Usually many funds in this category are open ended and investors can enter/exit the fund at regular intervals. Minimum investment This is INR 1 crore in all the 3 categories. Further additional investment can be of smaller value.
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Number of Investors The maximum number of investors in a single AIF scheme cannot exceed 1000. Individual investors who invest in AIFs usually have a minimum net worth of above INR 10 crores (net worth = total assets minus total liabilities) In this edition, let us learn about Category 3 funds popularly called as “Hedge Funds” They employ a range of diverse, complex and aggressive strategies with an objective to target absolute returns and alpha under any given market conditions. (Alpha means excess performance over any given market index) They can invest in any underlying financial product (example: equity stocks, derivatives, currency, bonds, and commodities) They can use leverage (i.e. borrow money to trade in securities) and invest and trade in any security or its underlying derivatives, whether listed or unlisted. They have their own internal team of researchers, analysts and fund managers to manage funds. These funds offer attractive returns in terms of IRR (Internal rate of return) in the range of between 12 to 40 per cent per annum to investors. These returns are “gross” and are at the “fund level”. Investors get “Net returns” which is after deducting “Fund management fees and other charges” These “Net returns” are “Taxable” in the hands of the investors and can range from 10 to 38 per cent per annum. Post tax these returns can be lower, based on the tax slab (usually all investors are in the highest i.e.: 30% tax slab) Investment tenure is usually between 1 to 10 years. Returns are indicative and not guaranteed by the fund. Investors have to remain invested for the full tenure to get the full benefits and they cannot exit before the completion of the fund tenure. Investors invest in these funds due to three main reasons: Diversification: These schemes present a special opportunity to diversify their portfolios from the traditional asset classes of equity and debt linked products. Hedge funds are known to follow
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advanced strategy based tools and techniques and have the potential for very high returns as well as high risk. Potential for high returns: Most schemes inform investors upfront in the scheme prospectus and scheme presentations that they are targeting high returns. These are target returns and not guaranteed by them. Reduced risk: These schemes have risk management processes in place and an experienced fund management team to manage and reduce portfolio risk (details are usually given in the scheme presentation and prospectus) Investors must note that Hedge funds are high risk investment products and can also lose money. Knowledge Centre Content A special section has been created for you to read and update yourself fully on this very promising asset class. Please click the link http://www.altsmart.in/knowledgecenter/faqmain.aspx News and Updates A special section has been created for you to read the latest news and updates covering the alternatives industry in India. Please click the link http://www.altsmart.in/newsmanager/news.aspx Funds listed on ALTSMART You can read details of the various open funds currently available for investment by registering on the site We look forward to your feedback and suggestions on info@altsmart.in Sincerely, Prashant Mehta Senior Vice President