Are SIFs just risky hedge funds? How do they protect against market crashes?

Question

I am looking at adding a Hybrid Long-Short SIF to my portfolio.

The fund manager says they use derivatives and short selling to protect against market falls.

I have always been told to stay away from F&O and derivatives because they wipe out capital.

How exactly does an SIF use shorting safely, and is it really safer than just holding a regular flexi-cap mutual fund during a market correction?

Sachin Kabra · Accepted Answer

The derivatives used in SIFs are strictly regulated by SEBI to manage and mitigate risk rather than acting as high-risk bets aiming to hit the ball out of the park. Traditional mutual funds are entirely long-only products.

If a specific sector like IT or private banks is underperforming, a regular mutual fund manager only has two choices. They can either avoid the sector or just hold cash. An SIF manager has the flexibility to actively short that index or specific stocks.

This turns a visible market weakness into a profitable trade and reduces the overall downside capture of your portfolio during sideways or bearish markets. To prevent these from becoming wild hedge funds, SEBI has put very strict guardrails in place.

Naked short positions are strictly capped at 25% of the total AUM. Furthermore, the total gross exposure including long, short and hedged positions cannot exceed 100% of the AUM. This is very different from AIFs which can take up to 200% gross exposure.

During the recent mid and small-cap corrections, hybrid long-short SIFs showed significantly lower drawdowns compared to the broader markets while still capturing a good portion of the upside when things rallied.

Disclaimer: All information shared above are strictly for educational and informational purposes only. It should not be construed as financial or investment advice.

Are SIFs just risky hedge funds? How do they protect against market crashes?

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