ICICI Prudential Long Short Fund

Nandik Mallik 

Nandik Mallik joined ICICI Prudential Asset Management Company

Limited in January 2017. His past employers were Fair Isaac, Bangalore, NM Rothschild, Mumbai, ICICI Bank, Mumbai, BNP Paribas, London, Credit Suisse, London, and Edelweiss Asset Management, Mumbai. Nandik holds a master’s degree in finance from London Business School, a postgraduate diploma in management from IIM Calcutta, and a bachelor’s degree in engineering from IIT Kharagpu

The ICICI Prudential Long Short Fund – Series 1 is a mutual fund managed by ICICI Prudential. One goal is to keep cash position in the index and hedge it using futures on a regular basis. It hopes to profit from the market’s movement in this way. Secondly, it seeks to build position through stock/index futures, which will be based on valuation. This seeks to profit from disparities in valuation between sectors. Thirdly, it will make directional calls using index options. It hopes to benefit from even range-bound markets in this way.

• Equity Valuation – Not very cheap
• 10 Year G-Sec Yield – 01%
• 3 Year AA Corporate Bond* – 94%

Long-Short Funds aims to generate absolute returns with low volatility, compared to Nifty 50 Index.

 Invest in good companies with good management at fair prices.

Role in Portfolio: Equity Long Short Strategy

Flexibility

 Equity Long Short Strategy has flexibility to protect capital and has potential to generate returns due to their ability to short stocks and adjust their exposure to the market.

Leverage

 Fund can also add leverage to the portfolio by increasing their gross position by 100%.

Managing Net Exposure

Fund can add value by adjusting the net exposure based on market conditions: Lowering net exposure when market conditions are unfavorable and increasing net exposure when conditions are favorable.

Long Short Strategy: Portfolio Positioning

• Allocation to Long Short Strategy typically comes in equity bucket with objective of risk reduction and enhancing return. It may complement your long only Equity Portfolio and aims to provide risk adjusted returns
• Long Short Strategy is suitable for investor who aims to reduce the volatility from their equity portfolio and aims to earn risk adjusted returns over medium to long term.

• The strategy is to invest in companies that have been thoroughly studied (via futures).
• Cash Positions can have exposure to Nifty and Bank Nifty stocks.
• The approach is to invest in businesses that have been extensively investigated (via futures).
• By writing index call/put options and collecting premium profits, options exposure seeks to profit from the market’s course.
• The AIF requires a minimum investment of Rs 1 crore.
• 100 percent Upfront Capital Contribution
• Subsequent subscription/exit – Monthly / Quarterly Redemption
• Management Fee – 1.50 percent of NAV per annum (paid daily) for Class B & C, 1 percent of NAV per annum (charged daily) for Class A
• Hurdle Rate – 12% per annum (pre-tax)
• Performance Fee – on a pre-tax basis, 20% per annually (p.a.) for Class A and B and 15% per annum (p.a.) for Class C beyond hurdle, with a high watermark. The ending NAV (after tax) of the year in which Performance Fees were last charged is the high watermark NAV.
• Exit Load – Class B & C: 0.5 percent of NAV for 3 months from the date of each allotment, above 3 months: Nil
• Nil in Class A.

Why Invest In Long-Short Funds?

Long-short funds can help mutual funds and PMS manage their diminishing alpha and client experience challenges.

Long-short funds provide the most investment options to fund managers. Long-short portfolios, like PMS, are not limited to a specific asset allocation or minimum equity ratio. Shorting and leverage are two further degrees of flexibility they enjoy.

If India is a stock picker’s market for investing in well-performing companies, it must also be a stock picker’s market for shorting companies that underperform.

Long-short portfolios provide a better client experience due to the stability of returns. Long short portfolios, comprising of hybrid mutual funds like equity savings  or balanced advantage funds, fall between traditional debt and traditional equity on the risk-return continuum.

As a result, they are less prone to performance chasing by advisers and customers and have lower volatility and draw downs than typical stock funds.

Individuals account for 70% of the industry’s AUM in long short funds, and it is discovered that anyone having 1 crore to invest in a – a successful entrepreneur, a Cxo, or a business family’s family office – has made their money priority both capital preservation and growth equally. Rather with the highs and lows of traditional equities, this client group prefers moderate but consistent returns. This is where long-short funds can assist a client with a pressing need.