Category III AIF - Long‑Only & Long‑Short
Category III AIFs are SEBI‑registered funds that can deploy diverse and complex trading strategies, including leverage and listed/unlisted derivatives. Unlike Category I/II (typically close‑ended), Category III may be open‑ended or close‑ended. Objectives often include absolute, market‑neutral, or enhanced market‑linked returns through active trading, hedging, pair trades, and derivatives – resembling hedge‑fund‑style approaches.
The Three Pillars: AIF Categories in India
SEBI classifies AIFs into Category I, II, III — each with distinct focus, constraints, risk/return dynamics, and suitability.
What it does
Primarily buys equities; may use derivatives for risk management — not to run net short.
Return profile
Seeks benchmark‑beating or absolute returns with tighter risk controls than typical long‑only mutual funds.
When it fits
Investors wanting institutional research, governance, and position sizing/hedging flexibility — without full long‑short complexity.
What it does
Runs net long, net short, or market‑neutral books using futures/options, pair trades, and CDS where permitted.
Leverage
Capped at 2× NAV (exposure = longs + shorts after permitted offsets) with robust risk and custodian reporting.
When it fits
Investors seeking smoother drawdowns, hedged equity, or alpha less dependent on market direction.
Why AIFs Matter: Unlocking the Alternative Edge
Open‑ended or Close‑ended
Category III may be open‑ended or close‑ended. Close‑ended schemes have a minimum 3‑year tenure and may list units for exit; open‑ended schemes follow SEBI redemption/liquidity norms.
Minimums & Corpus
₹1 crore minimum per investor (₹25 lakh for employees/directors of the fund/manager). Typical minimum corpus per scheme is ₹20 crore at first close.
Concentration
Common guidance references ≤10% of corpus per investee for Category III (may be higher for LVF variants).
Leverage limit
Exposure ≤ 2× NAV; exposure computed as longs + shorts (netted as permitted). Monthly reporting required for leveraged Category III.
Instruments & strategies
- Equities: Large/Mid/Small caps; sector/thematic books.
- Derivatives: Index/stock futures & options for alpha or hedging.
- Relative‑value / pair trades within sectors or factors.
Taxation – what investors actually experience
Practical takeaway: Category III managers target post‑tax, after‑fee outcomes at the fund level. Always review the PPM’s tax illustration and the latest circulars before committing.
Quick compare: Long‑Only vs Long‑Short (Category III)
| Dimension | Long-Only (Cat III) | Long-Short (Cat III) |
|---|---|---|
| Net exposure | Typically net long | Can be net long / neutral / short |
| Tools | Cash equities, derivatives mainly for hedging | F&O, pair trades, CDS (within 2× NAV cap) |
| Goal | Outperform benchmark / absolute return | Smoother return path; alpha less market-dependent |
| Volatility | Equity-like | Often lower net beta; tighter drawdown targets |
| Fit | Equity alpha with risk controls | Risk-managed alpha / hedged equity |
Eligibility & ticket size
Investor minimum: ₹1 crore (₹25 lakh for employees/directors of the AIF/manager).
Scheme minimum corpus: ₹20 crore at first close; timelines/definitions apply (especially for open‑ended).
Who should consider Category III?
- Investors are comfortable with active trading, hedging, and leverage limits.
- Those seeking alpha with risk budgeting (e.g., reduced drawdowns via long‑short).
- Portfolios needing diversification vs traditional long‑only equity or debt.
