After carving out a place in the Indian mutual fund industry over the last two decades, Franklin Templeton Investments has stepped into the nascent hedge fund space by launching Franklin India Long Short Equity AIF earlier this month. Naganath Sundaresan, President and CIO of Franklin Templeton Alternative Investments, explains the hows and whys of this fund in a brief chat with BusinessLine .

Why have you launched a Long-Short fund now?

We think the global equity bull market that began in March 2009 is now slowly winding down. In the last five years, we’ve had a great run in stock prices but the earnings growth has disappointed. Thus, price-earnings multiples for stocks have expanded tremendously. But we think that the headwinds to stock markets are now rising.

On the global macros, equities will face more headwinds in the next 12-24 months due to higher interest rates, less liquidity, tariff wars and so on. On the domestic front, there is potentially rising inflation and higher interest rates. So we think that the market volatility that we saw earlier this year will likely to continue.

Yes, the micro situation is now looking better, with domestic earnings beginning to pick up. But as the macro headwinds grow, the PE multiples can potentially decline. A long-short fund can address this expected market volatility with a flexible investment strategy. We find that demand for such funds is growing from HNI investors and family offices, who are seeking niche investment strategies that can possibly provide positive returns even if the market is negative. This is a Category III AIF structured as an open-end fund, with a monthly NAV and window for purchases and sales. The minimum ticket size is ₹1 crore.

How will this fund work?

We will be using fundamental research with an overlay of technical and quantitative analysis. We want to focus on generating absolute returns with low downside risks. We intend to use index options to hedge our positions.

Today, we are seeing far higher dispersion between the best and worst performing stocks in every sector. In many stocks, timing your buys and sells well can deliver far higher returns than buy and hold. The rewards of astute trading can be high.

What is your investment strategy?

There are two kinds of investment positions we intend to take. Trading positions will be generally held for less than a month and investment positions will be generally held for more than a month. We plan to use stop-loss limits for both.

According to regulations, the leverage for a Category III AIF cannot exceed two times the fund’s AUM. So, on the derivatives side, we will be buying options in the indices/stocks. We do not intend to write options. To take long positions, we may buy cash equities, stock futures or call options in a stock/index. We plan to short mainly using stock futures, stock puts or index puts.

Our net exposure will depend on our near-term market view and will be calibrated on a dynamic basis. Our objective is to generate an attractive post-fee, post-tax return.

We also want to ideally aim for no negative return in any month. Towards this we will look to hedge our net long or net short positions through index options.

What is the fee structure?

We have six different classes of shares, of which one is for the sponsor, one is for employees and the other four are for investors with different ticket sizes ranging ₹1-50 crore and above. The total expense ratio (TER) will be between 0.6 and 1.75 per cent a year of the NAV depending upon the share class. The hurdle rate is 10 per cent a year and the performance fee is 20 per cent of the returns in excess of the hurdle rate.

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