In conversation with Ajay Vora, Fund Manager - EDGE, EVP, Investment Management, Edelweiss Wealth Management

Given that investors typically turn to alternative sources to supplement their existing capital markets exposure and complement their returns, Ajay Vora, Fund Manager (EDGE), EVP (Investment Management), Edelweiss Wealth Management, elaborates about the existing scenario

Could you briefly explain the difference between alternative investment fund, portfolio management strategies and mutual fund?

Mutual funds via systematic investment plans (SIPs) are usually the gateway to equities or fixed income investing for most investors as these are cost and tax-efficient and liquid. These are bite-sized investment products managed by professional fund managers, usually deploying one or more of the defined investment strategies. These range from low-risk options like ETFs, liquid funds, Large-Cap equity funds or balanced advantage funds to less conventional but essentially balanced strategies in terms of risk like sector or theme-based or others that offer exposure to international equities.

On the performance front, though, these typically mirror the broader market, so your returns will also be in a similar range. In fact, of the large-cap MFs, only ~25 per cent have outperformed their benchmarks when seen over the last three years. This search for alpha or outperformance is one of the reasons most investors turn to AIFs and PMS offerings. While both PMS and AIFs are great investment options for diversifying one’s portfolio from traditional MFs and earning higher returns on capital over the long term, these involve slightly higher risk and are hence more suited to a nuanced, experienced class of investors.

These include high-net-worth individuals (HNIs) and ultra HNIs as well as family offices and institutions. This is also why the minimum entry point for investment in AIF or PMS is Rs 1 crore and Rs 50 lakhs, respectively. Where AIFs are pooled investment instruments, PMS is usually a tailor-made, bespoke service for a more concentrated, specialised exposure. Investors typically turn to alternative sources to supplement their existing capital markets exposure and complement their returns. Moreover, alternatives offer a ton of investment options from real estate, infrastructure, credit, thematic, and so on.

Which are the key reasons that are driving investors towards AIFs?

Globally, it’s the institutions that have led the growth of alternatives whereas it’s an entirely different picture in India where domestic family offices and HNIs have led the alternatives market. This is why the evolution of products in India’s AIF space has been very nuanced and tailored to clients’ specific needs. In my opinion, four precise client requirements are driving the rise of AIFs among the investor community in India.

• Yield: Historically, Indians have had it easy on the yield front with quasi-sovereign options giving close to double-digit returns. However, the new normal of lower yields has pushed Indian investors towards alternative strategies like structured credit, which offers close to 12-16 per cent per annum, which are only available in the AIF format.
• Access: As already mentioned, alternatives provide access to the entire world of private investments from venture capital and debt to growth and late-stage options, depending upon your risk appetite, real estate, credit and infrastructure, among others.
• Diversification: Typical AIF investment strategies have a very low correlation to the listed equity or debt markets, thus providing a great avenue to diversify the exposure to achieve a better risk-adjusted return.
• Volatility: India being an emerging market, keeping the volatility and chaos at bay is a critical need. AIFs have the potential to bring consistency to portfolio returns as their performance isn’t linked to market cycles or benchmarks. Also, long-short funds have the ability to take advantage of such times by going short on themes or stocks expected to perform adversely and protect their portfolios via hedging.

With the high volatility prevailing in Indian capital markets, what is the current scenario of the AIF space?

Alternative investment funds are especially relevant today during times of elevated volatility because they either offer a) lower correlation to existing asset classes in one’s portfolio (e.g. private equity, real estate or credit ) or b) the ability to hedge against and take advantage of market fluctuations (e.g. long-short funds). In my opinion, there is no alternative to investing in alternatives. While they can’t ever be 100 per cent of one’s portfolio, I would say about 15-20 per cent allocation towards this asset class is a good target.

AIFs can help diversify dependence on one asset class’s performance while preserving capital and generating returns instead of mirroring the broader market. Additionally, some AIFs also employ derivatives strategies – the critical differentiator in managing market fluctuations – to bring stability to one’s portfolio. Because of these factors, AIFs have already raised a staggering Rs 6 trillion+ and are only expected to grow exponentially as more and more investors turn towards this investment avenue.

Could you shed some light on the investment philosophy behind Edelweiss Wealth Management's CAT III AIF (long-short fund) EDGE fund?

EDGE is an open-ended Category III AIF and one of the forerunners in India’s long-short AIF space. Typically, a long-only investment approach exposes investors’ portfolios to market cycles. EDGE, being a long-short fund, mitigates such a scenario by running a relatively lower net exposure and systematically hedging its portfolio through its proprietary method. The fund has two clear objectives: generating consistent returns over the long term through a target-based investment approach while managing fluctuations in the market to limit drawdowns. And we have delivered just that. During this ongoing nine-month correction phase in the market, EDGE has delivered an alpha of ~5 per cent versus Nifty, which is down ~10 per cent.

This outperformance has come in a year marked by multiple adverse global events, including regulatory crackdowns, inflationary pressures, a pandemic and geopolitical tensions. We believe in being stubborn about our goals and flexible about our methods. Our performance results from a unique blend of three complementary investment strategies that have helped us build a robust core portfolio while being nimble to alpha generation opportunities over the short term. Moreover, using derivatives helps hedge the portfolio against adverse events and leverage opportunistic trades. This flexible investment approach gives the fund an ‘edge’ over its peers.