Types & Categories of Alternative Investment Funds (AIFs)
1. Category I AIF
Alternative Investment Funds (AIFs) which invest in the unlisted & private space of start-up or early-stage of ventures and popularly known as venture capital equity or debt funds. Besides the world of start-ups and disrupting ideas, this category also covers social ventures or SMEs or infrastructure projects or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital debt funds, SME Funds, social venture funds, infrastructure debt or equity funds and such other Alternative Investment Funds as may be specified.
2. Category II AIF
Alternative Investment Funds (AIFs) which invest in the unlisted or private space of mid stage or late stage of a business either in form of debt or equity. These funds, when investing in the mid-stage of a business are also called private equity funds or PE funds. The same CAT II funds, when investing in late stage businesses are called Pre-IPO funds. Both these categories of funds are very popular and many investment companies have AIFs running in this category, like Edelweiss, IIFL, Kotak, Axis, Avendus, and so on.
While the above described are equity funds, mid stage investing can also be in the form of debt financing as well and then these funds are called Real Estate funds, Credit Opportunities Funds, Distressed Asset Funds [as lending is in such funds is against real estate projects or business cash flows or business assets as a collateral for the lending], and so on. Again, this category is also very popular with companies like Sundaram, HDFC, Birla, Axis, Kotak, Edelweiss, IIFL, and so on.
3. Category III AIF
Alternative Investment Funds (AIFs) which invest primarily in the listed space of equities across large, mid, small cap businesses and are allowed to employ diverse or complex trading strategies and may employ leverage through investment in listed or unlisted derivatives. This is one of the most popular and largest categories from the sellers and buyers’ perspectives as this category has maximum number of funds, as well as maximum number of investors.
Category III AIFs are further divided into Long Only and Long Short Funds.
Long Only Alternative Investment Funds (AIFs) are investment vehicles that primarily focus on long-term investments in various asset classes. These funds typically aim to generate returns by investing in stocks, bonds, commodities, or other securities, with the objective of profiting from the upward price movements of these assets over time.
Unlike traditional mutual funds or equity funds that have restrictions on short selling or taking bearish positions, Long Only AIFs solely participate in long positions, which means they only buy and hold assets with the expectation of their value appreciating in the future. These funds are suited for investors who have a positive outlook on the market and seek to benefit from overall market growth.
Many well-known companies with long only AIFs are ICICI Prudential AMC, Motilal Oswal, ASK, Alchemy, 360 ONE (previously IIFL Asset Management), Abakkus, Sage One, Unifi AIF, and so on.
On the other hand,Long Short Alternative Investment Funds (AIFs) employ a flexible investment strategy that allows them to take both long and short positions in various asset classes. These funds aim to generate returns by simultaneously betting on assets that they expect to increase in value (long positions) and assets they anticipate will decline in value (short positions).
By taking short positions, which involve borrowing and selling assets they do not own in the hopes of repurchasing them at a lower price later, Long Short AIFs can profit from falling markets or specific asset price declines. This strategy provides opportunities for potential gains in both bullish and bearish market conditions, as the fund managers actively manage the portfolio to capture relative value disparities and exploit market inefficiencies.
Long Short AIFs are suitable for investors seeking a more dynamic investment approach that allows them to potentially generate positive returns even in volatile or declining markets. The ability to hedge against market downturns or capitalize on specific investment opportunities sets Long Short AIFs apart from traditional long-only investment funds.
In case of Long short funds, taxation happens at the fund’s end and the investors returns are net of fees, expenses, and taxes.
Some companies with Long short AIF products are Tata Captial, Kotak Asset Management, Avendus Capital, 360 ONE (previously IIFL Asset Management), Edelweiss, ITI, and so on.
