Long-Short Funds in India: How They Work and Top Options Compared

For most of the last decade, hedged equity in India was a private club with a ₹1 crore entry ticket. That changed on 1 April 2025, when SEBI's framework for Specialised Investment Funds came into force and allowed mutual fund houses to run long-short funds for anyone who could invest ₹10 lakh.

The money followed quickly. According to AMFI's SIF monthly report for August 2026, the latest available on 5 October 2026, the industry held ₹31,175 crore across 33 strategies and 1,25,539 folios on 31 August 2026. Every one of those 33 strategies is a long-short product of some kind. On the older side of the market, SEBI's quarterly AIF data shows Category III AIFs with commitments of ₹3,37,192 crore as of 30 June 2026, although that figure also includes long-only funds because SEBI does not publish a long-short split.

The same phrase now describes very different products: a mutual-fund-style scheme that can short a quarter of its book, and a privately placed fund that can run exposure of twice its assets. Track records are thin on one side and shrinking on the other.

This guide explains how a long-short strategy works, how shorting is done under Indian rules, how the two vehicles differ, and what a sourced, dated comparison of named options looks like. It does not rank funds by return, because the data to do that honestly does not exist yet.

A long-only fund has one source of return: the stocks it owns go up. A long-short fund has two books.

• The long book holds stocks the manager expects to rise. This is ordinary equity investing.
• The short book holds positions that gain when a stock or index falls. The manager uses it either to hedge the long book or to profit from companies expected to do badly.

The return is the sum of both books, minus costs, and it can come from three places.

• Stock selection on both sides. Say a manager is long a well-run bank and short a weaker lender. If the strong bank rises 12% and the weak one 4%, the pair makes money although both went up. If the strong bank falls 5% and the weak one 15%, the pair still makes money. The profit is the spread between the two.
• Hedging the market. A manager who likes the stocks but fears the index can short index futures against them. This is the most common use of the short book in India.
• Changing exposure quickly. Selling ₹200 crore of shares takes time and moves prices. Shorting ₹200 crore of index futures takes minutes.

Take a hypothetical fund with ₹100 of assets: ₹70 in stocks, ₹25 short through futures and ₹5 in cash.

The first two rows are the sales pitch: less of the upside, much less of the downside. The third row never makes the slide. When the manager is wrong on both sides, the fund loses on both sides. Hedging swaps market risk for manager risk.

• Gross exposure is longs plus shorts, as a percentage of the fund's net assets. It tells you how much is at work in total.
• Net exposure is longs minus shorts. It tells you how much market direction you are still carrying.

A fund with net exposure of 45% should move roughly half as much as the market if its stock picks are average. At 0% net, the index barely matters and the manager is everything.

Gross exposure measures how hard the capital is working. SEBI's Master Circular for AIFs, issued on 3 June 2026 and last updated on 7 September 2026, defines leverage as total exposure, longs plus shorts after permitted offsetting, divided by NAV. It caps a Category III AIF at 2 times NAV. In the circular's own example, a fund with a NAV of ₹100 crore may carry exposure of up to ₹200 crore.

Real funds sit inside the ceiling. The ITI Long-Short Equity Fund publishes its ranges on its own site: maximum gross of 200%, typical gross of 80% to 120%, typical net of 25% to 60%, and a permitted net range from minus 15% to 100%. The fund is allowed to be net short.

When you compare long-short funds, ask each for its average and range of net exposure. A fund that sits at 85% net for years is an equity fund with a hedge-fund fee.

In textbooks, shorting means borrowing a share, selling it and buying it back later. Indian funds rarely do it that way.

SEBI's framework for short selling, restated in a circular dated 5 January 2024, allows all classes of investors to short sell but prohibits naked short selling, bars institutional investors from squaring off intraday, requires institutions to declare a short sale when the order is placed and limits eligibility to securities traded in the F&O segment. Delivery must be honoured at settlement.

So funds use derivatives. To short a stock, the manager sells its stock futures. To hedge the portfolio, the manager sells index futures or buys put options. Positions are exchange-traded, margined and marked to market daily, with three consequences.

1. The shortable universe is limited. You can only short what has a liquid derivative, so short books lean toward larger companies and indices.
2. Futures expire. A short held for a year must be rolled from contract to contract, and each roll has a cost or a gain.
3. Losses are settled in cash, daily. If a shorted stock rises, the fund pays margin that day.

SEBI's SIF circular of 27 February 2025 lets a SIF take exposure of up to 25% of net assets in exchange-traded derivatives for purposes other than hedging and portfolio rebalancing. SEBI's explanation says this unhedged short exposure is in addition to derivative positions taken for hedging. Offsetting is allowed between cash and derivative positions on the same underlying security.

Two more limits matter. The cumulative gross exposure of a SIF strategy across equity, debt and derivatives cannot exceed 100% of net assets, and the circular's illustration caps a single-stock short at 10% of the strategy. In SEBI's worked example, a ₹100 crore strategy can short at most ₹10 crore of one company's futures and ₹25 crore of stock futures in total.

The idea is older than most investors assume. Alfred Winslow Jones, a former Fortune writer, is credited with creating the first hedge fund structure in 1949. He combined leverage to buy more shares with short selling to remove market risk, and called the result a "hedged" fund.

India took decades to build the plumbing.

The most telling entries are the ones that run the other way. In January 2025, Avendus Capital said it would wind down its hedge funds business, which housed the Avendus Absolute Return and Avendus Enhanced Return funds. In March 2026, Mint reported that Tata Asset Management had begun an orderly liquidation of its two Category III funds, Tata Absolute Return Fund and Tata Equity Plus Absolute Return Fund. The company's spokesperson cited "structural considerations, including taxation, minimum investment thresholds, and the emergence of Specialized Investment Funds".

The strategy has not changed. The wrapper has, and capital is moving toward the one with the lower ticket and the friendlier tax treatment.

Short books run on exchange-traded contracts with daily margining, so close exposure monitoring is essential, and SEBI requires Category III AIFs to have systems that track exposure against the leverage limit. Some offer documents, such as Sapphire's, describe a quantitative multi-factor model for stock selection. SIFs must publish full portfolios, including derivatives, as a downloadable spreadsheet on the AMC and AMFI websites, and every offer document must carry a scenario analysis of the expected loss from market moves.

Both vehicles let a manager go long and short. Almost everything else differs. Other posts on this site cover SIF and Category III basics, so this table keeps only what changes the long-short outcome.

Three differences deserve a closer look.

The short cap changes what the fund can be. A market-neutral book, 100% long and 100% short, is legal in a Category III AIF and impossible in a SIF. An equity long-short SIF must hold at least 80% in equities, so it will usually be net long. A SIF is an equity fund with a hedging toolkit. An AIF can be a true hedge fund.

The tax gap is wide. In Mint's March 2026 illustration, a Category III AIF earning 15% before tax and taxed at 39% delivers about 9%, while a SIF earning 11% and paying an effective 15% long-term capital gains tax delivers about 9.35%. The exact fund-level rate depends on the type of income and the trust structure, and parts of it are contested, which a separate post in this series covers. The direction is not in dispute.

Transparency runs in opposite directions. A SIF publishes its offer document and portfolio. An AIF reports privately. Only one lets you do homework before you meet a salesperson.

One category note. SEBI's circular defines seven SIF strategy types, and AMFI's August 2026 report shows schemes in five. Hybrid long-short strategies held ₹19,670 crore, about 63% of all SIF assets, against ₹3,450 crore in Equity Long-Short and ₹6,289 crore in Equity Ex-Top 100 Long-Short. With only a 25% equity floor, hybrid products are a different animal from hedged equity.

The tables below list named options with the terms their own documents publish, sorted by launch date, not merit.

All nine carry the SEBI minimum of ₹10 lakh at PAN level, offer daily redemption on business days and are benchmarked to a broad equity index. Source: each strategy's Investment Strategy Information Document on the AMFI portal, read on 5 October 2026. Exit loads can change, so confirm before investing.

On cost, offer documents give ceilings, not actuals. The qsif, Diviniti and Sapphire documents each estimate recurring expenses of up to 2.25% of daily net assets, and iSIF up to 2.10%. Actual expense ratios are on each SIF's website.

On size, the Equity Long-Short category held ₹3,450 crore across 11 strategies and 23,556 folios on 31 August 2026, per AMFI. Press tables based on ACE MF data put individual strategies between roughly ₹90 crore and ₹1,000 crore as of 30 June 2026.

On performance, there is nothing to rank. The oldest strategy closed its NFO on 1 October 2025, so none had a full year of history on the date of writing.

AIFs are privately placed, so the table records only what the manager or a major publication has published.

A caution on the one published track record: the ITI figure is stated before fees and taxes, and a Category III AIF pays both, so the investor's experience is lower.

The closed funds are in the table on purpose. Listings can lag reality. Before you study any long-short AIF, confirm that it is still accepting money.

Used for the right job, hedged equity earns its place.

• Smaller drawdowns in falling markets. PMS Bazaar data for August 2025, a month in which the Nifty 50 TRI fell 1.21%, showed 31 long-short AIFs averaging minus 0.32% against minus 1.95% for long-only AIFs. ITI's monthly insight records the Nifty falling 11.4% in March 2026 and rebounding in April; over the two months the fund reported a 2.5% decline against 3.84% for the index.
• A second source of return. A long-only manager can only express a negative view by not owning a stock. A long-short manager can earn from it. Chinmay Sathe of The Wealth Company Mutual Fund told Business Standard that such strategies are particularly useful when performance diverges widely across companies and sectors.
• A ride that is easier to hold. Investors abandon good funds in bad drawdowns. A fund that falls less is one more people stay in.
• Speed. Exposure can be cut with futures in minutes, without selling core holdings.
• Access at a lower ticket. A long-short SIF brings the strategy to investors with ₹10 lakh, with daily NAVs and public documents.
• Diversification from your other equity. A low-net fund has a different return pattern from the PMS and mutual funds most affluent investors already hold.

Comparing hedged strategies is harder than comparing ordinary equity funds, because the fact that matters most, how much market risk the fund carries, is rarely on the first page.

PMS Sahi Hai is an APMI-registered distribution platform covering PMS, AIF and GIFT City strategies. Its AIF comparison page lists 269 AIFs across Categories I, II and III, and lets you filter by strategy, vintage, lock-in and minimum ticket, with IRR, NAV history and structure shown side by side. You can shortlist up to four strategies and line them up together. Three things are useful here.

• Individual pages for long-short AIFs. Strategies such as the ITI Long Short Equity Fund, the Helios India Long Short Fund and the ICICI Prudential Long Short Fund Series I each have a page showing benchmark, inception date, trailing returns and a "Facts & fees" block. The pages state that growth charts and risk figures are modelled to the disclosed since-inception return and are illustrative, so use them to shortlist and then ask the manager for the actual NAV series and current status.
• One score on one basis. Every card carries a Nyra Score, a 0 to 10 research metric scored against published absolute standards across five pillars with fixed weights. A long-short fund and a long-only fund are read on the same scale, which makes the cost of a hedge visible.
• Nyra, for the questions a table cannot answer. Nyra is described on the site as an AI grounded only in SEBI, AMC and IFSCA primary sources that cites its working on every answer, and that refuses when there is no verifiable source. One of its starting prompts is "Which AIF fits my profile?", filtered to your capital and horizon. Nyra is an analytical tool, not a SEBI-registered Investment Adviser.

One limit to be clear about: the comparison shelf covers PMS, AIF and GIFT City products. SIFs are mutual fund products, so for those the primary sources are the offer documents and monthly data on AMFI and each SIF's own website.

The limitations are real, and some are structural.

• You give up returns in strong markets. Business Standard, citing PMS Bazaar data, reported that in FY22 long-only AIFs returned 30.6% on average against 13.6% for long-short funds, and only 2 of 12 long-short strategies beat the Nifty 50's 18.8%. ITI's fund gained 0.34% in April 2026 while the Nifty rose 7.46%, because, in the manager's words, low net exposure "led us to lose participation".
• Shorts can lose without limit. A stock you own can fall to zero. A stock you are short can keep rising. Losses on the short book are settled in cash every day.
• Both books can lose together. Hedging removes market risk, not selection risk.
• Fees are layered in AIFs. A management fee plus a performance fee takes a large share of a modest, steady return.
• Tax can decide the outcome. Fund-level tax was among the reasons fund houses gave for closing Category III products. For SIFs, tax depends on the scheme's equity share and your holding period.
• SIFs are constrained and untested. The 25% cap and the 100% gross limit mean an equity long-short SIF cannot fully hedge and stay invested. No SIF has been through a full market cycle.
• Capacity is finite. The shortable universe is limited to F&O names, so a strategy that works at ₹300 crore may not work at ₹3,000 crore.

Use these seven questions on any product, in either wrapper.

1. What is the average and the range of net exposure? This single answer tells you whether you are buying a hedged equity fund or an absolute-return fund.
2. What is the short book for? Hedging with index futures, alpha from single-stock shorts, or both. Ask for the share of each.
3. What happened in the worst months? Ask for the largest drawdown and how long recovery took, alongside the index for the same period.
4. What does it cost, all in? For a SIF, the actual expense ratio of the plan you will buy. For an AIF, the management fee, performance fee, hurdle, high-water mark and expenses.
5. What do I keep after tax? Ask for a post-tax illustration at your own slab and holding period.
6. How and when can I leave? Redemption frequency, notice period, exit load, and for an AIF any lock-in or gate.
7. Who is running the short book, and for how long have they done it? Shorting is a separate skill. A strong long-only record does not prove it.

On sizing, experts quoted by Business Standard in September 2026 made the point plainly. Meeting the ₹10 lakh minimum should not be the reason to invest, and a SIF deserves a place only when it adds a capability your existing investments lack.

No long-short fund in India can honestly be called the best today. There is a best-fitting structure for each kind of investor.

• If you have ₹10 lakh to ₹1 crore for this allocation and want equity returns with a softer landing, an equity long-short SIF is the practical route. Expect it to stay mostly net long, and choose on process and cost, because track records are under a year old.
• If you want low volatility more than equity upside, look at the hybrid category, and judge it against arbitrage and conservative hybrid funds, not against equity.
• If you have ₹1 crore or more and want a genuinely hedged or market-neutral book, only a Category III AIF can run it. Go in with a post-tax number and proof that the fund is open.
• If you cannot state the fund's net exposure in one sentence, wait.

Long-short funds are a tool for controlling risk, not for beating a bull market. Size them as a satellite, compare structure before returns, and re-check the facts each quarter. The comparison tools on PMS Sahi Hai and a few direct questions to Nyra will get you to a shortlist. The seven checks will get you to a decision.

A hedged fund is easy to buy and hard to judge. Before you sign, put the candidates next to each other.

• Open the AIF comparison page on PMS Sahi Hai, filter for Category III and shortlist the long-short strategies you are considering.
• Ask Nyra which AIF fits your capital and horizon, and ask it to show the source behind each number.
• If you already hold PMS, AIF or mutual fund positions, run the portfolio health check first. It reads each holding on returns, risk, manager tenure and fees, so you can see whether a hedged allocation fills a gap.

Then take the seven checks to the manager. If the answers on net exposure, post-tax return and exit terms are clear, you have a candidate. If they are not, you have your answer.

This article is for information only and is not investment advice. Figures are as of the dates stated and were checked on 5 October 2026. Long-short strategies involve derivatives and can lose capital. Read the offer document or placement memorandum and consult a SEBI-registered adviser before investing.