Summary of this article
Hedged Specialised Investment Funds don't always guarantee true downside protection.
SIF returns show extreme divergence between winners and losers.
Buying financial protection in funds limits strong market gains.
October marks exactly one year since the very first specialised investment fund (SIF) was launched in India, creating a completely new avenue for investors.
Notably, the Securities and Exchange Board of India (Sebi) introduced these funds to bridge the gap between traditional mutual funds and high-ticket portfolio management services (PMS).
By requiring a minimum investment of Rs 10 lakh, these SIFs sought to give high networth individuals (HNIs) access to complex investment strategies that regular mutual funds are not allowed to use. The discourse around SIFs soon began to revolve around their ‘safety’ and ‘hedging’. Since SIFs are legally permitted to use derivatives to short the market and hedge against drawdowns, the product was also talked about for its ability to offer “downside protection”.
However, a factsheet by B2B wealth management platform, AssetPlus, hints that paying for a hedged portfolio does not automatically guarantee downside protection when benchmarks slip during drawdowns.
How Does Hedging Work In SIFs
In mutual funds, the fund manager buys stocks and waits for them to go up. In a hedged fund, the manager is allowed to actively bet that certain stocks will drop in value. For the investor, what this means is that if the broader market dips, these protective bets will make a profit and cushion the blow to the investor’s overall portfolio which may be exposed to the broader market.
However, hedging does not automatically guarantee safety from downsides. This has become more noticeable given recent drawdowns, wherein the benchmark Nifty closed in the red for eight straight weeks or two months.
According to the data mentioned in the factsheet, during the last two months, the Nifty 50 TRI fell by 7.90 per cent, and the Nifty 500 TRI fell by 6.70 per cent. On the other hand, the ITI Diviniti Equity Long Short Fund, which is benchmarked to these indices, fell by 7.40 per cent, which, in turn, dragged its total return since inception down to -13.70 per cent.
Similarly, the Franklin Templeton Sapphire Equity Long Short Fund SIF dropped by 6.20 per cent in that same time period, leaving it at a negative 5.30 per cent return since its launch. One of the probable reasons for this is the fact that hedging relies on human predictions. If a fund manager buys protection against the wrong stocks, the investor loses money on both ends of the trade.
Divergence In SIF Performance
In traditional mutual funds, schemes within the same category tend to offer similar returns. However, in the SIF space, the gap between the winners and the losers is extremely wide. Within the hybrid category, the Quant QSIF Hybrid Long Short Fund generated a massive absolute return of 28.60 per cent since its launch. On the exact opposite end of the spectrum, the Tata Titanium Hybrid Long Short Fund delivered a negative return of 1.90 per cent since its launch.
Within mid-cap schemes, the Quant QSIF Equity Ex Top 100 and the 360 ONE DynaSIF Equity Ex Top 100 posted strong gains of 12.10 per cent and 10.70 per cent respectively since their launch. However, these positive numbers stand in stark contrast to the single digit returns or even negative returns generated by other schemes within the same category.
Even for the funds that successfully navigated the market dips, the data shows that buying financial protection comes with a heavy cost. The factsheet showed that over a six-month period, unhedged market indices saw strong gains as the Nifty SmallCap 250 TRI surged by 19.70 per cent, and the Nifty MidCap 150 TRI rose by 9.30 per cent. Despite this strong market rally, most hedged equity funds delivered highly subdued returns that generally hovered between 1 per cent and 6 per cent.
The long-term performance of SIFs as a category remains to be seen. However, the one-year returns show that while these funds offer professional managers sophisticated tools to navigate volatile markets, investors need to understand whether they need hedged returns or not before making an investment decision.
Additionally, the data also shows that for the affluent investor making the jump from mutual funds to SIFs, it is critical to remember that ‘hedged’ should not be confused with the word safe.
