SIFs Explained: The New Era of Long-Short Strategies in India

The New Era of Long-Short Strategies in India

Ravi, an IT professional, has always been curious about markets. He’s seen bull runs where everything goes up, even the stocks everyone knows are overpriced. 

“Why can’t I profit when those fall?” he often wondered. That’s the power of shorting - betting against a stock and gaining when it drops.

But Ravi quickly realised - this isn’t an easy game for individual investors. Shorting needs constant monitoring, sharp timing, and deep research - one wrong move, and losses multiply fast.

That’s why most investors, like Ravi, rely on professionally managed funds to handle complex strategies on their behalf - traditionally through mutual funds or bespoke PMS mandates. 

Now consider the segment of pooled funds known as Category III AIFs, which are designed for long-short equity and other alternative strategies. These funds can deploy short exposures and derivatives in a portfolio context, though in practice many remain long-biased. By contrast, standard mutual funds cannot take short positions, and most PMS mandates focus on long-only portfolio construction with derivatives primarily used for hedging rather than directional shorting.

However, AIFs typically come with higher costs - management fees plus performance-linked carry (often 10-20% of profits) - and less favorable taxation, where returns are treated as business income, leading to a higher tax outgo compared to mutual funds.

Then, earlier this year, Ravi stumbled upon something new, a structure SEBI introduced on April 1, 2025 - called Specialized Investment Funds (SIFs), marking an interesting evolution. Structured like mutual funds but offering hedge-fund-like flexibility, they bring long-short and market-neutral strategies to a broader set of investors - all within a mutual fund-like tax and transparency framework.

SIFs could “democratize access to alternative strategies” by combining the sophistication of AIFs with the liquidity and cost efficiency of mutual funds. Over time, they may play a pivotal role for investors seeking smoother returns when markets turn volatile.

SIFs take this a step further by allowing up to 25% of the portfolio in short positions, helping funds benefit from both rising and falling markets.

In essence, SIFs blend:

• The discipline and oversight of mutual funds

• The flexibility and active positioning of hedge-like strategies

• A regulatory framework under SEBI’s AIF umbrella

For Ravi, it clicked - finally, an investment product that didn’t force him to choose between safety and opportunity.

He calls it “growth with guardrails.”

How SIFs Work in Practice

Long-short strategies in SIFs typically identify:

• High-conviction longs - quality companies with strong earnings momentum

• Strategic shorts - overvalued or technically weak stocks

By pairing the two, SIFs attempt to generate alpha even when the broader market lacks clear direction. This approach often delivers lower correlation with major indices and smoother return profiles.

Types of SIF Strategies

Strategy Type	Core Idea	Short Exposure (max)	Example
Equity Long-Short	Buy strong stocks, short weak ones	25%	Hedged equity play
Ex-Top-100 Long-Short	Focus beyond top 100 stocks	25%	Mid & small-cap focus
Sector Rotation Long-Short	Rotate between up to 4 sectors	25%	Tactical sector play
Debt Long-Short	Bond/credit arbitrage	25%	Dynamic debt fund
Hybrid / Active Allocator	Equity + debt mix	25%	Balanced long-short fund

Each AMC can launch only one SIF per type - keeping the category focused and disciplined.

Early Movers

• Quant MF: QSIF Hybrid Long-Short Fund

• SBI MF: Magnum Hybrid Long-Short Fund

• Edelweiss MF: Altiva Hybrid Long-Short SIF

Investor Eligibility & Safeguards

• Minimum Investment: ₹10 lakh across AMC’s SIFs

• Accredited Investors: No minimum threshold

• Systematic Plans: SIPs/SWPs allowed if total reaches ₹10 lakh

• AMC Requirements: 3+ years in business, ₹10,000 crore AUM

• Risk Limits: 10% per stock, 25% max short exposure

• Transparency: Monthly disclosures, SEBI oversight

All of which means, you get institutional-grade innovation, within retail-grade regulation

What Backtesting Data Suggests

Since SIFs are new, fund houses have released back-tested data based on model portfolios.

Fund	Back-Tested Period	Strategy	Annualised Return	Volatility	Correlation (NIFTY 50)
Edelweiss Altiva Hybrid Long-Short Fund	2013–2024	50% long / 25% short	~11–12%	~8–9%	~0.45
NIFTY 50		100% long	~12%	14-15%	1.0

(Source: Fund house backtesting disclosures; not actual fund returns)

While these results are encouraging, they represent simulated performance - actual outcomes may vary once deployed with real capital.

When to Use Long-Short Strategies

Long-short strategies shine in:

• Sideways or corrective markets - where pure equity funds struggle to find direction.

• High-volatility phases - where the short book helps cushion downside.

However, in strong bull markets, such strategies may lag pure equity portfolios since short positions cap upside.

For diversified investors, SIFs can play the role of a risk-adjusted return stabilizer - complementing traditional equity and debt exposure rather than replacing them.

WealthBeacon’s View

SIFs represent a welcome evolution in India’s investment landscape - offering institutional-grade long-short strategies with regulatory oversight.However, since they are newly launched products with limited live performance history, at WealthBeacon we recommend a “wait and watch” stance before committing significant allocations.

As more data emerges on real-world performance, SIFs could become an important tactical component in high-net-worth portfolios - particularly for those seeking alpha in uncertain markets.