While HNIs seek high returns, hedge fund assets exceed 5 lakh cr

Alternative investment funds (AIFs), as a separate asset class, have been gaining in importance in recent times due to the increase in the number of high net worth individuals and their growing appetite for sophisticated financial investment instruments.

Total AIF assets recently passed the 5 lakh crore mark for the first time recently. According to the latest data from the Securities and Exchange Board of India, AIF assets grew by more than 32% year-on-year to reach 5.35 lakh crore at the end of September 2021. Total assets of AIFs stood at 4.05 lakh. crore in September 2020 and ₹ 3.17-lakh crore in September 2019.

“While traditional investment avenues such as term deposits, stocks and bonds are effective tools for generating wealth, savvy investors are increasingly turning to AIFs to generate additional alpha. Higher projected returns, low correlation with traditional asset classes, which allow for portfolio diversification, and recent clarity on AIF structures, standards and taxation have all contributed to a recent increase in AIF allocations. Said Sabyasachi Mukherjee, Head of Investments, Fisdom Private Wealth. .

R Pallavarajan, Founder and Director of PMS Bazaar, said investor appetite for improved returns, portfolio diversification beyond traditional equity and debt asset classes, and growing product awareness are some of the factors driving the growth of this alternative investment product.

“AIFs offer a plethora of structures, varieties and products. For example, some clients wish to invest in start-up ecosystems but do not have expertise in this area, while others wish to invest in venture capital or private equity (PE) funds. AIFs allow them to do this, because for every customer need, there is a product. Therefore, we see a lot of interest in this space, ”Pallavarajan added.

According to a latest report from PMS Bazaar, AIFs assets under management (AUM) are expected to grow six-fold to 30 lakh crore over the next 10 years, growing at a compound annual growth rate (CAGR) of 20%. .

Structured in the same way as mutual funds, the AIF is a private investment vehicle that collects money from sophisticated private investors, both Indian and foreign, to invest with an investment policy. defined. It has a minimum investment limit of 1 crore.

Three categories

In accordance with SEBI guidelines, AIFs are classified into three categories. Category I AIFs include venture capital funds, angel funds, funds for SMEs, social venture capital funds and infrastructure funds. The Category II AIF covers private equity (PE) funds, real estate funds, funds for distressed assets, debt funds and funds of funds. Category III AIFs are those traded for the purpose of generating short-term returns and include hedge funds and PIPE funds.

On a per category basis, Category II AIF represents 80 percent of total assets at 4.28 lakh crore, followed by Category II (57,953 crore) and Category I (₹ 48,394 crore).

“Category II offers a plethora of products. There will be real estate products, short long products, debt funds but with a different product offering. For example, there are funds that focus on debt financing for start-ups with fixed returns, etc. PMS Bazaar’s Pallavarajan said.

He also added that Category II AIFs have gained ground in recent years as some asset managers invest in companies at the pre-IPO stage, thus achieving good returns for investors after their listing.

“We expect investors to seek out investment strategies in AIFs that follow non-traditional models, such as long and short strategies, pre-IPO and structuring products, in order to further diversify their set of opportunities. As the volatility of domestic stocks increases and valuations appear stretched, while fixed values ​​income investments continue to provide low returns, ”said Mukherjee of Fisdom.

Despite their recent appeal, AIFs are still considered to be aimed at sophisticated investors. Mukherjee believes that complex strategies, illiquidity (most AIFs have a strict foreclosure period), difficult ways to value underlying assets, and higher taxes are some of the significant challenges facing the business. of AIF is facing.

Product awareness

Pallavarajan says the lack of knowledge of the product itself is another challenge, but adds that it has improved in recent times.

“There are over 700 AIFs in the country, but customers are only aware of 30 to 40 of them. There are a variety of products still waiting to be discovered by investors,” Pallavarajan said, adding that “However, AIFs cannot be as public as a mutual fund or a PMS because it is a private product and SEBI has clearly mandated that if someone needs to put money into AIF, they must develop in depth through a private placement memorandum.

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