Exploring Altiva Hybrid Long-Short Fund

The world of investment continually adapts to offer specialized platforms that meet targeted investor needs. The Specialized Investment Fund (SIF) has emerged as a distinct platform within the Mutual Fund (MF) structure. SIFs are uniquely positioned to offer the "Best of both worlds," combining a tight regulatory landscape with significant taxation efficiency and flexible investment strategies.

Key Differentiating Features of the SIF Platform

The SIF structure carves out a distinct position when compared to traditional structures like Mutual Funds (MF), Portfolio Management Services (PMS), and Alternative Investment Funds (AIFs).

• Minimum Investment: The minimum investment required across Altiva SIF strategies is Rs. 10 Lakh. This is notably lower than the minimum investment of Rs. 1 Crore required for AIFs and Rs. 50 Lakh for PMS.

• Taxation at Fund Level: SIFs benefit from Nil taxation at the fund level, as per Section 10 (23D). In contrast, a Category III AIF, depending on the structure, is taxed at the maximum marginal rate (MMR) of 42.7%^.

• Taxation at Investor Level (Hybrid Strategy): For the Altiva Hybrid Long-Short Fund, which is categorized as "Other," long-term capital gains (LTCG) are taxed at 12.5% after a holding period of more than 24 months. Short-term capital gains (STCG) are taxed as per the slab rate.

• Leverage and Flexibility: SIFs permit derivatives usage for hedging and rebalancing, and also allow for short exposure through unhedged derivatives up to 25%. While Mutual Funds and PMS generally prohibit leverage, Category III AIFs are permitted leverage with gross exposure up to 200%.

• Categories: The SIF platform allows for 7 differentiated scheme categories, including Equity Long-Short Fund, Debt Long-Short Fund, and the Hybrid Long-Short Fund.

Focus: The Altiva Hybrid Long-Short Fund

The Altiva Hybrid Long-Short Fund is presented as an interval investment strategy that invests in equity and debt securities, including limited short exposure in equity and debt through derivatives. The fund is designed as an income-oriented solution.

The primary objective of this strategy is to generate capital appreciation through equity and equity-related instruments, along with income derived from arbitrage, derivatives strategies, special situations, and fixed income investments. The return profile aims for debt-like returns with the potential for limited to moderate equity upside.

Portfolio Construction and Strategy Drivers

The Altiva Hybrid Long-Short Fund is structured to be an all-weather strategy, utilizing a combination of multiple strategies to aim for smoother outcomes regardless of the overall market direction in the medium term. The strategy is built on core income methods complemented by enhanced drivers.

1. Core Strategies (Aiming for Income and Stability):

   • Fixed Income (40-60%^ Allocation): This involves investing in quality debt instruments with the goal of generating accrual and potential price appreciation. This includes allocating around ~20% to the BFSI sector and ~10% to the Non-BFSI sector, typically with maturities up to 5 years.

   • Cash-Future Arbitrage & Covered Call (20-40% Allocation): These arbitrage strategies are utilized to capture low-risk returns. Arbitrage involves capturing a riskless profit, such as buying a security in the spot market and simultaneously selling its futures contract at a higher price, relying on the convergence of prices at expiry.

2. Enhanced Drivers (Offering Moderate Equity Upside):

   • Derivative strategies (10-20% Allocation): This component includes implementing Long-Short equities, Straddle, Strangle, and Put-call Parity. For example, a Covered Call involves holding a stock while selling a call option to earn premium income. A Short Straddle involves selling both a call and a put at the same strike price and expiry, aiming to profit when the asset stays near the strike price due to low volatility. A Short Strangle involves selling Out-of-the-Money (OTM) call and put options for premium income in range-bound markets, offering a wider buffer.

   • Special Situations (0-10% Allocation):* This focuses on selective opportunities such as IPOs, Open Offers, Buybacks, Mergers/Demergers, QIPs (Qualified Institutional Placement), and Index inclusion/Exclusion. The team has demonstrated capability in trades like QIPs, where shares are sold to institutional investors at a discounted price, and Buybacks.

Risk Management and Expected Performance

The fund aims for consistent income with low volatility. The strategy is expected to outperform in Bull Markets, Extremely High Volatile Markets, and Flat Markets. It may, however, underperform during Sharp Bear Markets or periods of Very Low interest rates / Sharp rises in interest rates.

The strategy employs robust risk management techniques to provide downside protection:

• Strategy-Level Stop Loss: A 5% stop loss is maintained at the strategy level.

• Stock Limits: Single stock exposure is capped at less than 3% for Large Cap stocks and less than 2% for Mid Cap stocks, ensuring diversification across more than 20 stocks.

• Hedging: Delta hedging/arbitrage is used to manage exposure and mitigate drawdowns.

• Special Situations Risk: For volatile events like Open Offers or Buybacks, the single stock position limit is set higher for F&O stocks (up to 10%) compared to Non-F&O stocks (up to 5%).

Based on back-tested data, the Altiva Hybrid Long-Short Strategy has outperformed the traditional arbitrage strategy since inception. The average 2-year rolling return for the back-tested strategy was 10.10%, significantly higher than the 6.60% average for the arbitrage strategy. Furthermore, the Annualized Standard Deviation (SD) for the back-tested strategy was 1.40%.

Fund Details and Investment Team

The fund is managed by a highly specialized team with experience across derivatives and special situations. Key fund managers include Mr. Bharat Lahoti and Mr. Bhavesh Jain for Equity, and Mr. Dhawal Dalal for Debt. Mr. Dalal serves as the Chief Investment Officer (CIO) for Fixed Income and has 28 years of experience.

Key fund details include:

• Minimum Application Amount: INR 10 lakh.

• Redemption Frequency: Redemptions are available twice a week (Monday and Wednesday).

• Exit Load: There is an exit load of 0.50% if units are redeemed/switched out within 90 days of allotment, which becomes Nil thereafter.

• Tax Efficiency: Investors benefit from the tax efficiency of the SIF structure, where long-term capital gains are taxed at 12.5% over a 2-year period, making post-tax returns highly competitive compared to Category III AIFs with similar strategies.

Risk & Other Disclosers:

Investors should be aware that investments in Specialized Investment Funds (SIFs) involve relatively higher risk, including potential loss of capital, liquidity risk, and market volatility. There is no assurance that the investment objective of the Investment strategy will be achieved. This document is solely for information purposes and should not be construed as an offer to sell or a solicitation to buy any SIF units/securities