The Nifty 50 fell 14% between September 2024 and March 2026.
During that same period, several long-short SIF strategies held their ground - not by predicting the fall, but by being positioned for it.
Here's how.
First, What "Going Long" Means
When a fund manager goes long on a stock, they buy it expecting it to rise.
Example: The manager believes HDFC Bank will go from ₹1,700 to ₹1,900. They buy ₹10 lakh of HDFC Bank. If the stock rises 12%, they make ₹1.2 lakh.
Every regular mutual fund is entirely "long." They buy stocks hoping they go up. In a falling market, a long-only fund has no protection.
What "Going Short" Means
When a fund manager shorts a stock, they profit when the stock falls.
They do this by selling a stock they don't own (borrowing it via derivatives), with the plan to buy it back cheaper later.
Example: The manager believes a stock is overvalued at ₹800. They short ₹5 lakh via F&O contracts. The stock falls to ₹650. They close the position. Profit: ₹93,750 - from a stock that fell.
In a SIF, short (unhedged) exposure is limited to 25% of net assets as per SEBI rules. This prevents excessive speculation while allowing meaningful protection.
Hedged vs Unhedged - A Critical Distinction
Not all short positions in a SIF are the same. This distinction matters for understanding both risk and tax.
Unhedged short: A directional bet that a specific stock or sector will fall. The fund manager actively profits (or loses) based on price movement. This is what drives the "protection" in falling markets - but also carries its own risk if the view is wrong. SEBI caps this at 25% of net assets.
Hedged position (arbitrage): The fund buys a stock in the cash market and simultaneously sells it in the futures market at a higher price, locking in the spread. This is not a directional bet - it doesn't matter if the stock goes up or down. The spread is locked in at trade execution, and both positions are closed at futures expiry when prices converge.
Why does this matter? A fund can hold 65% gross equity (enough to qualify for equity tax treatment) while much of that 65% is in hedged arbitrage positions - meaning the actual market risk (net equity exposure) is far lower than 65%.
This is why conservative Hybrid SIF funds can behave like income funds while still getting equity taxation. The hedge removes the directional risk. The gross exposure preserves the tax benefit.
The Long-Short Combination - What It Creates
A SIF fund manager runs both long and short positions simultaneously.
Example portfolio (simplified, ₹1 crore):
Long positions (₹80 lakh): HDFC Bank ₹15L, Infosys ₹12L, Maruti ₹10L, and other positions.
Short positions - unhedged (₹20 lakh via derivatives): IT sector basket ₹8L, real estate stock ₹7L, capital goods company ₹5L.
Net equity exposure: ₹60 lakh (60% of portfolio).
Now the market falls 10%:
• Long book loses approximately ₹8 lakh
• Short book gains approximately ₹2 lakh
• Net loss: ₹6 lakh vs ₹8 lakh in a regular fund
The short positions don't eliminate the loss. They reduce it. That's the point.
Three Scenarios, One Portfolio
|
Market Condition |
Long-Only Fund |
Long-Short SIF |
|
Rising 15% |
+15% |
+10% to +13% (shorts limit some upside) |
|
Flat / sideways |
0% to +2% |
+3% to +6% (arbitrage + derivatives generate income) |
|
Falling 15% |
-15% |
-8% to -12% (shorts cushion the fall) |
The trade-off is clear: you give up some upside in rising markets in exchange for better downside protection in falling markets.
Over a full market cycle - which includes both rises and falls - this trade-off has historically generated better risk-adjusted returns than long-only strategies. That's the thesis behind every SIF.
The Tools SIF Managers Use
Pair Trades: Buy one stock (strong), short a comparable one (relatively weaker) - profit from the performance gap, not market direction.
Covered Calls: Sell call options on existing long positions to generate premium income - reduces cost of holding.
Arbitrage: Buy a stock in the cash market and simultaneously sell it in the futures market at a higher price - locks in the price gap with no directional market risk. Both positions close at futures expiry.
Sector Pairs: Long one sector, short another when macro conditions favour the trade.
Why This Matters Right Now
The Nifty 50 is down 4.12% from a year ago. Markets have been volatile. Earnings recovery has been uneven.
In this environment:
• A long-only mutual fund depends entirely on the market going up to generate returns
• A long-short SIF has tools to generate returns whether the market goes up, sideways, or down
This is why ~84% of all SIF assets have gone into hybrid long-short strategies, not aggressive equity long-short funds. Conservative investors are choosing structured downside protection over pure equity exposure. See which Hybrid Long-Short SIF funds are currently open in India, with their NAV history, expense ratio, and equity exposure , so you can judge the strategy in practice, not just in theory
Next in this series - Post 3: SIF vs Mutual Fund vs PMS vs AIF - The Complete Comparison
Explore all 27 SIF funds: https://andfintech.in/sif
Dwipa Shah | AND Fintech |
NISM Certified: Series 5A (MF) · Series 21A (PMS) · Series 19A (AIF) · Series XIII (SIF)
ARN-301536 | https://andfintech.in/sif