It’s difficult to box this fund in. With a minimum 65 per cent in equity, it falls into our ‘Hybrid: Equity oriented’ category. On the other hand, it could have the appearance of an asset allocation fund. The reason being that the hedged portion of the fund can range between 0-100 per cent of the total equity exposure. So a 60 per cent equity allocation completely hedged would effectively result in no equity (0%) allocation. Or, more realistically, a similar allocation hedged up to 25 per cent would have an effective market exposure of 35 per cent.
Why would that happen? Because the fund aims to provide an equity exposure at one-third of the volatility of the Indian market by playing out various strategies simultaneously.
Low-risk strategy: Investments in debt are made in paper of less than 90 days duration. Arbitrage is also pursued with the aim of ensuring that the equity taxation status is maintained.
Equity, un-hedged: This refers to special situations in terms of corporate actions which are episodic in nature – open offers, mergers, delisting, capital raising etc.
Equity, hedged dynamically: This portion, which logically contributes the most to capital appreciation, is hedged to contain volatility. The portfolio will comprise of 25-45 stocks with majority being large caps (70%) and all drawn from the top 200 stocks by way of market capitalisation.
It is here that the quantitative model comes into play. It determines the stocks to be picked, the proportion of representation and the daily hedge limits. The fund will never be short (regulations do not permit it), but whether it is long 10 per cent of the fund or 50 per cent depends on what the quant model recommends based on market conditions. Its inherent character shows that it cannot be recommended on the basis of its returns. When the market is bright and sunny, it takes it on the chin. In the quarter ended March 31, 2012, the fund delivered only 4.81 per cent (category average: 13.35%). But when clouds loom, its performance is impressive. It topped the charges in 2011 with a fall of just -2.26 per cent (category average: -16%).
Don’t opt for this fund if you want to beat the benchmark. You have to be completely in sync with its mandate to make it work. If you are looking for a low volatility, equity-oriented product, the appeal is undoubtedly apparent. n