SIFs—Will the New Long-Short Framework Succeed?

SEBI introduced the Specialized Investment Funds (SIF) framework effective from April 1, 2025. SIFs are designed to bridge the gap between mutual funds and portfolio management services (PMS), and offer both retail and sophisticated investors a new asset class for investment.

SIFs are designed to permit more aggressive strategies—especially long-short equity positions using derivatives—under a pooled investment structure, unlike the individually managed PMS accounts. The move aligns with global trends that see rising investor interest in tactical and sectoral strategies. However, the point to be noted is that it is often done using short positions as a hedge or return enhancer.

Under the SIF framework, SEBI has capped the maximum short exposure at 25%, and has not prescribed a minimum short threshold. This raises a concern that fund houses could technically launch a “long-short” fund, yet run it like a traditional long-only equity fund, claiming no shorting opportunity exists. These structures are designed to provide fund managers tactical flexibility within investor protection guardrails. The question, is whether these tools will be actively and effectively used, or whether the long-short promise will be diluted in execution.

Key Questions

Though forward looking, the SIF Framework raises key questions: Do fund managers have the conviction and capability to short effectively in India’s growing market? If Cat-III AIFs haven’t embraced shorting despite years of flexibility, will SIFs fare any better? Will SIFs be meaningfully different from long-only funds? Are there enough distributors for selling SIF ? Are Indian fund houses truly prepared—technically and institutionally—to navigate the risks of complex derivative strategies within SIFs?

Is the Shorting Skillset missing?

India’s markets have yet to develop a strong shorting culture. Post-liberalization, only few notable short-sellers had emerged, while currently majority of  fund managers remain long-biased. Shorting demands deep conviction, discipline and risk management. Unless these capabilities evolve, SIFs risk becoming an underutilized regulatory innovation, launched in form but not in spirit.

Shorting in a Growing Economy?

India’s strong macroeconomic fundamentals makes shorting harder to justify. With over USD 700 billion in forex reserves, robust bank and household balance sheets, and FPIs holding over Rs. 80 trillion in assets under custody, the broader market narrative remains positive. Thus, executing nuanced short positions in such scenarios becomes both difficult and risky.

Cat III AIF—an eye opener?

Even in the AIF Cat III space, which has allowed long-short flexibility for years, fund houses have largely stuck to long-biased products, suggesting a lack of conviction or capability to run true short strategies. In practice, very few funds have meaningfully pursued shorting strategies. Most of them are long-biased, often structured to replicate PMS-like flexibility but in a pooled format.

Many Category III AIFs focus on buying and holding stocks (long-only), and are mainly set up this way to avoid the paperwork and complexity involved in handling individual PMS accounts. This shows that just having the rules in place doesn’t mean the market is ready or willing to use more advanced strategies like long-short.

As of March 31, 2024, only 258 of the 1,283 SEBI-registered AIFs are Cat III—the only category allowed to short through derivatives. That just 20% of the registered AIFs are Cat-III funds reflect a lack of traction even in the institutionalized AIF space. This raises further questions whether the SIF framework will have better fate—unless fund managers build real conviction in shorting strategies.

Lack of Certified Distributors

Distributor preparedness is limited, with few MF sellers certified in derivatives—and thus limiting the AMCs ability to garner assets in SIFs.

Derivatives and SIF—Are fund houses prepared?

SEBI’s finding that over 90% of retail traders in equity derivatives lose money, raises questions about the market’s preparedness for complex, derivative-heavy products like SIFs. SIFs are designed to allow long-short strategies, therefore their success depends on sound risk management, skilled fund managers, and investor awareness. Without these, there’s a real risk that SIFs could be misused, remain long-only in practice, or worse—further erode trust in the market they aim to deepen.

Policy Prescriptions

Without a significant shift in market mindset, distribution capability, and shorting skill, SIFs may struggle to scale despite their conceptual strength. To prevent long-only funds masquerading as SIFs, it would be better if certain ‘minimum’ threshold (say 10%-20%) for short positions is compulsorily required for SIFs instead of current requirements which mandates a short position of ‘max’ 25% (fund manager can sit at zero short position and effectively run a long only fund in the name of SIF).

To conclude, while SIFs offer strong structural benefits—such as the flexibility to hedge, take contrarian positions, and navigate volatile markets—their practical adoption may remain limited. Without the right ecosystem, SIFs could eventually be perceived as no different from existing PMS or AIF offerings, despite their differentiated design.

 

Authors:

Kunj Bansal is General Manager and Rasmeet Kohli, is Sr. AGM, at the National Institute of

Securities Markets. Views are personal.

 Originally published in The Mint.