-Ashwin Patni, Head Products & Alternatives, Axis AMC
Alternative investment strategies in India are offered through the Alternative Investment Funds (AIFs) and the Portfolio Management Service (PMS) vehicles. It is a diverse market with a large number of different strategies being offered across different asset classes. Before we summarise its future potential, let’s take stock of the 2 vehicles available.
Portfolio Management Services
Historically the PMS space has been dominated by traditional long-only equity strategies but run more aggressively as compared to others. As a result, even though assets have grown, we have seen a number of boom and bust cycles in PMS as the high risk mid-small cap strategies work during the bull market but fail hugely when the market turns. The market correction in the last 2 years has not been kind to most managers and as a result there is a disaffection from investor community. Adding to the flux are potential changes in regulations proposed by SEBI – including curbs on distribution fees and a higher minimum ticket size.
Alternative Investment Funds
They have been around for a relatively brief period and most strategies are yet to see a complete market cycle. However, given the well-designed structure and a sensible framework, AIFs are well suited for offering alternative investments and should see a strong growth over time. Category III AIFs (especially those using derivatives) however are suffering from uncertainty on the taxation side, which has been further compounded by higher LTCG tax rates and surcharges imposed in recent years.
The market structure and way forward
With greater sophistication in investor and advisor base, demand and availability of genuine alternative strategies has been increasing. On the flip side, we have seen some aggressive distribution fees and launch of vanilla me-too strategies in alternative garb through PMS/AIF vehicles which may lead to a potential clamp-down by the regulator.
Some of the key asset classes on which alternative strategies are now available in India include the following:
Structured/ distressed credit
While some of the above – such as real estate – have been around for a fairly long time, commodities are the newest kid on the block with regulatory go-ahead received in the last year. A few other strategies – such as quant and long-short – remain smaller in size for now, but have the potential for rapid scale up over time.
Apart from an expansion of available strategies, a number of other key trends will help shape the alternative landscape going forward:
Emergence of family offices and RIAs
Emergence of fund manager led boutiques even while higher allocations continue to go to large managers with strong brands
Investor search for diversification from traditional listed equity risk
Demand for absolute return ideas
Adoption of successful global strategies for the local market
Alternatives have gone beyond their infancy and are entering a period of adolescence. Tough market and a watchful regulator will keep forcing discipline on this teenager even as it displays drastic mood swings related to success/failure of individual strategies in the short term.
Through this period, advisors will have a key role to play. Robust due diligence and healthy scepticism of theoretical/ back-test returns will be crucial. Equally important will be an acknowledgement that all strategies go through up-and-down cycles and to not panic at the first sight of under-performance provided the long term investment thesis is sound.
Alternatives are becoming increasingly relevant to the portfolios of sophisticated investors and are benefiting from a supportive regulatory framework. Even as there are some pains – largely on Cat III taxation – which are holding it back, there can be a bright future for this space over the medium to long term.
Disclaimer: Securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Fund will be achieved. As with any securities investment, the value of a portfolio can go up or down depending on the factors and forces affecting the capital markets. Past performance of the Fund Manager or AMC may not be indicative of the performance in the future.
This document is for informational purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investments mentioned in it. Investors are not being offered any guaranteed or indicative returns through these services. The contents of this document should not be treated as advice relating to investment, legal or taxation matters. The material is prepared for general communication and should not be treated as research report. All investors must read the detailed Disclosure Document and Private Placement Memorandum (PPM), contribution agreement and annexure to the said documents, including the Risk Factors and consult their stockbroker, banker, legal adviser and other professional advisers to understand the contents of this document and/or before making any investment decision/contribution to AIF/PMS.