Category III AIFs Lead the Pack with Record Growth Amid Regulatory Shifts and Emerging Strategies Category III AIFs in India have emerged as a crucial segment within the country's financial landscape, offering unique investment strategies to high-net-worth individuals (HNIs) and institutional investors.

Category III Alternative Investment Funds (AIFs) have shown the highest year-on-year and three-year compounded annual growth rates in total assets under management (AUM) at approximately 79 per cent and 43 per cent respectively, according to Rishi Kohli, CIO- Hedge Fund Strategies at InCred Alternative Investments.

Category III AIFs in India have emerged as a crucial segment within the country's financial landscape, offering unique investment strategies to high-net-worth-individuals (HNIs) and institutional investors.

"Even the number of new funds in this category has been the highest by far over the past year compared to Category I and II with a 43 per cent increase," said Kohli.

According to the Securities and Exchange Board of India (SEBI), Category III AIFs encompass hedge funds and other funds that undertake leveraged strategies to achieve short-term returns.

"While long-only strategies dominate the Cat-III AIFs with 61 per cent of the share, the interest in long-short strategies in Cat-III has been slowly increasing and gaining ground over the past few years with more players entering the segment and more types of strategies being launched in the long-short segment," said Kohli.

SEBI, notably clamped down on weekly index options, directing NSE and BSE to keep one index each on which weekly options were allowed, which resulted in NSE and BSE choosing Nifty and Sensex respectively. This also resulted in weekly options for BankNifty, FinNifty, Bankex, and MidcapNifty being discontinued from November 2024.

"The other indices were relatively less liquid but the BankNifty weekly options had the highest liquidity among all the indices hence discontinuation of the same came as a shock to most market participants and pure option traders and managers will have to modify/tweak their strategies and style to diversify their BankNifty weekly options exposure to Nifty/Sensex weeklies and other indices and stocks monthly options. So this was an unexpected market regime change forced by the regulator," said Kohli.

Sebi also announced a New Asset Class (NAC), which turned out to be significant for long-short strategies in 2024.

"SEBI's announcement of a New Asset Class (NAC) which would allow Mutual Funds to launch long-short strategies using derivatives with gross exposures being within the MF regulations of 100 per cent and focused on investors with minimum ticket sizes of INR 10 lakhs for whom SEBI believes this NAC can fill the gap between MF and PMS. Derivatives exposure will be capped at 25 per cent of the AUM for non-hedging and rebalancing purposes," said Kohli.

Kohli also reported that the Indian equity markets as denoted by the Nifty index ranged till the beginning of May, between a 4-5 per cent band, after which saw a spike till the end of September but with high volatility.

"First at the result announcement of the general elections in early June and then mini-bouts in early August and early September. Then from the end of September to the end of November, it had the first 10 per cent correction for the year, a double-digit decline seen after a long time," said Kohli.