Hybrid Long-Short SIFs Are Emerging As Alternatives To Arbitrage MFs, But Experts Warn Against Direct Comparison

Hybrid long-short specialised investment funds (SIFs) are emerging as an option for investors who have traditionally looked at arbitrage funds for relatively lower-risk equity exposure. While SIFs can use a wider range of strategies to generate returns, experts say they should not be seen as a replacement for arbitrage funds. The two categories differ mainly in how they generate returns. Arbitrage funds largely seek to benefit from price differences between a stock in the cash market and its futures contract. Hybrid long-short SIFs, meanwhile, can combine equity, debt, arbitrage, derivatives, hedging and selective long and short positions.

Says Gibin John, senior investment strategist at Geojit Investments: “Arbitrage funds earn returns mainly from price differences between the cash and futures markets. Hybrid long-short SIFs, on the other hand, provide greater flexibility by investing across equity, debt, and long-short strategies, offering higher return potential, but with higher risk.”

This wider mandate has helped hybrid long-short SIFs to attract investor interest, even though the category is still small compared to established mutual fund categories.

According to data from the Association of Mutual Funds in India (Amfi), total SIF assets stood at Rs 17,858 crore as of June-end with hybrid SIFs accounting for 71 per cent of total SIF assets or assets of around Rs 12,679 crore. By comparison, arbitrage funds have assets of around Rs 3.44 lakh crore, while balanced advantage funds (BAFs) having assets of around Rs 2.54 lakh crore.

SIFs Have More Ways To Generate Returns

Arbitrage funds have a relatively narrow return engine, with performance largely dependent on the availability of arbitrage opportunities between the cash and futures markets. When these spreads narrow, the return potential from the strategy can also decline.

Says Ajay Kumar Yadav, certified financial planner and certified financial manager, group CEO and chief investment officer (CIO), Wise Finserv: “The main advantage is that SIFs can earn returns in different ways. Arbitrage funds mainly earn from the price difference between the cash and futures markets. If this difference becomes smaller, their returns may also fall. Hybrid long-short SIFs may generate returns through debt accrual, arbitrage, equity selection, hedging, relative-value opportunities and selective long and short positions.”

The flexibility also allows SIF managers to change their market exposure based on their view. They can hold stocks that are expected to rise, hedge positions, or use permitted derivatives to benefit from stocks or indices expected to fall. “Hybrid long-short SIFs allow fund managers to take long positions in stocks that are expected to rise and short positions to benefit from falling stock prices. This flexibility enables managers to combine equity, debt, and long-short strategies, making these funds particularly suitable for uncertain market conditions,” says John.

That flexibility, however, does not mean that SIFs will necessarily deliver better returns.

Higher Flexibility Also Means Higher Risk

Having more investment options also means there are more factors that can affect returns. Says Yadav: “These benefits come with additional risk. A broader toolkit does not guarantee superior returns or lower volatility. Hybrid long-short SIFs carry market, derivative, liquidity, strategy and execution risks.”

This is where arbitrage funds continue to have an advantage for a certain class of investors. They offer a relatively simpler strategy and are generally used by investors looking for a substantially hedged equity allocation or for parking money for shorter periods. “Arbitrage funds may remain more suitable for short-term parking and investors seeking a simpler, substantially hedged strategy. Hybrid long-short SIFs suit investors with an adequate horizon and the ability to tolerate varied outcomes,” Yadav adds

For this reason, experts see the two categories competing for some investor money, but not necessarily serving the same purpose. “SIFs should be viewed as a differentiated portfolio solution, not as a universally superior replacement for arbitrage funds or balanced advantage funds,” he adds.

Hybrid Long-Short SIFs Vs Arbitrage MFs: Performance

Performance data shows why hybrid long-short SIFs have attracted attention. However, the numbers do not provide a direct apples-to-apples comparison.

Among arbitrage mutual funds, Quant Arbitrage Fund delivered a one-year return of 7.45 per cent, the highest among the five funds in the data set. Motilal Oswal Arbitrage Fund and WhiteOak Capital Arbitrage Fund followed with 6.91 per cent each. Franklin India Arbitrage Fund delivered 6.79 per cent, while Invesco India Arbitrage Fund returned 6.61 per cent.

Hybrid long-short SIFs have also delivered healthy returns since their respective launches. QSIF from Quant Mutual Fund has yielded 9.84 per cent since inception, followed by Edelweiss Mutual Fund’s Altiva at 9.59 per cent.

ICICI Prudential Mutual Fund’s iSIF has delivered 6.31 per cent returns since its February 2026 launch, while Apex from Aditya Birla Capital AMC has delivered 6.12 per cent since March 2026. SBI Mutual Fund’s Magnum has returned 4.58 per cent since its inception in October 2025.

The arbitrage fund figures are one-year returns, while the SIF figures are returns since inception. Most hybrid long-short SIFs have been around for less than a year, making a direct performance comparison inappropriate.

The SIF category has also not yet gone through a full market cycle. Investors have limited evidence on how these strategies will perform during a prolonged market correction, sharp volatility, or a period when both equity and derivative strategies come under pressure.

HNIs And Family Offices Lead Early Demand

SIFs are mainly attracting wealthy and informed investors, rather than regular retail investors.

“Early adopters of a hybrid long-short SIF are wealth-channel high networth individuals (HNIs) and family offices, with corporates (especially listed) becoming relevant only after the strategy establishes a consistent track record,” says Kalpesh Jain, fund manager for SIFs at Kotak Mutual Fund.

“Family offices are natural buyers because long-short hybrids can serve as they understand derivatives and hedging, and are comfortable evaluating alpha-generation strategies,” he adds.

Yadav says the Rs 10 lakh minimum investment and the complexity involved make the category more suitable for investors who understand the risks. “Early interest is led by HNIs, affluent investors, and family offices, with selective participation from corporate treasuries. The Rs 10 lakh minimum investment cap and the need to understand derivatives, taxation and liquidity make SIFs more suitable for informed investors than the mass-retail segment,” he adds. 

The Rs 10 lakh minimum investment also makes SIFs more accessible than portfolio management services (PMS) and Category III alternative investment funds (AIFs), where minimum investment requirements are generally much higher.

However, the lower entry threshold should not be mistaken for lower risk.

Hybrid Long-Short Is A Structure, Not A Strategy

Another important factor for investors is that all hybrid long-short SIFs will not behave in the same way. “Hybrid long-short is a structure, not a strategy. The underlying investment philosophy, net exposure, hedge ratio, and risk budget determine whether the fund behaves like a conservative wealth-preservation vehicle, a risk-managed equity fund, or an aggressive alpha-seeking product,” says Jain.

This means the label alone does not tell investors how much risk a particular SIF is taking. Net equity exposure, the use of derivatives, asset allocation, and the fund manager’ risk appetite can all lead to different outcomes across schemes.

The Takeaway

For investors, the choice between the two categories depends on what they want from their portfolio, rather than just returns.

Arbitrage funds may suit investors looking for a simple, hedged strategy and a short-term parking option. Hybrid long-short SIFs may suit those who are comfortable with more risk and complexity and want fund managers to use a wider range of strategies to generate returns.

The fast growth of SIFs shows that investors are exploring options between conventional mutual funds and products such as PMS and Category III AIFs. However, it will take more time to gauge whether SIFs can consistently deliver better returns for the risks involved.