The new Arudha Equity Long Short Fund aims to deliver Nifty 500 kind of returns but with half the volatility of the broad market index.
Over the long term, it is a proven fact that protecting downside in market corrections while participating fully in market upturns tends to create greater wealth than outperforming markets on the upside but suffering large drawdowns on the downside.
HNIs who have been looking at products like BAFs to meaningfully participate in equity markets but with lower volatility now have this as a potentially superior alternative, as the SIF has many more tools available to manage volatility than MFs are allowed access to.
That said, use of derivatives does heighten the risk profile of the product. Bandhan is conscious of this and will therefore be using derivatives very judiciously and within internally set limits.
The fund will have 4 streams of returns – long equity, short equity, debt and covered calls.
Debt can go upto 20% of the portfolio.
Covered calls will be used actively in sideways and correcting markets to boost income and will be used very sparingly in bullish trending markets.
Extent of short positions will be based on a view on markets but will be anyway capped within SIF regulations.
The fund manager can take short positions in stocks which he believes are overvalued. In effect, the overall short positions will be a combination of stock specific short positions and the balance to the desired level coming from a market index short position.
Long positions will be bottom up ideas aimed at driving alpha through superior stock selection