Inside This Article
Category III AIFs are the most diversified and flexible of all three categories. These funds employ sophisticated strategies to increase returns. They are essentially hedge funds, which involve the trading of derivatives, arbitrage strategies, and other market-linked opportunities. Category III AIFs are ideal for investors who are accustomed to a high-risk and high-reward strategy.
Key Characteristics
- Levarege and Derivatives: Category III AIFs are allowed to use leverages, which makes these funds inherently riskier than Category I and II AIFs.
- Short-Term Orientation: Category III AIFs are primarily short-term-oriented funds, which exploit market volatilities and opportunities for gains.
- Regulated But with Flexibility: SEBI has put specific limits on leverage and other compliance regulations so that the risk is minimized; on the other hand, a lot of flexibility is offered to the fund managers in executing strategies.
Types of Category III AIFs
- Hedge Funds:
Hedge Funds use techniques like short-selling, arbitrage, and derivative trading to generate returns in any market.
In India, the hedge fund space has been growing steadily with assets under management crossing ₹30,000 crore in 2023. - Long-Short Funds
These funds have a long position in under-valued stocks and short positions in over-valued stocks. It generates returns in both upward and downward market movements. - Arbitrage Funds
Arbitrage funds exploit the arbitrage in between related security or market positions, often with low-risk strategies. It would thus be invested to exploit such market inefficiency for a buyer/seller.
Growth of Category III AIFs
As SEBI puts it, Category III AIFs have garnered much more attention because the total assets almost touched ₹1 lakh crore in 2024. The strategy of hedge fund investment has gained immense importance in Indian investors due to sophisticated investing and due to markets that are more integrated in a global arena, gaining acceptability towards category III AIF’s due to returns in bull or bear market conditions.
Who Should Invest?
Category III AIFs are meant for those investors who have high-risk appetites and are more interested in following complex trading strategies. They are best suited to sophisticated investors, HNIs, and institutions seeking short-term gains and portfolio diversification.
