The past half-decade has seen an unprecedented rise in the number of registrations of AIFs in India. While the number of registered AIFs at the beginning of 2018 stood at a modest 366, registrations had soared to 637 as of January 2020. AIFs witnessed a 60% rise in capital growth in the past year alone. As of September 2019, AIFs had raised in total $21.7 billion – more than 11 times the $1.95 billion raised as of September 2015.
With the expansive and far-reaching development witnessed by the alternative investment fund (AIF) industry in India, both on the regulatory and the commercial front, AIFs have emerged as a significant pivot to many emerging investment structures. For a regulatory framework that was conceived in 2012, in a short span of time, the AIF framework has metamorphosised into a much mature regime, which even large global asset allocators do not hesitate to use for their India focused structures. This regulatory evolution of AIFs has further catalyzed inception of innovative fund structures and investment forms, wherein AIFs are being used to cater to bespoke investment strategies.
The revenue model of AIFs is based upon charging the costs. There is no regulatory limit on costs in AIFs unlike the limits on total expense ratio (TER) in mutual funds. Complex profit sharing arrangements are also common. You may have to pay a 2% management fee on the total value of your AIF investment every year and a 20% share in the profits that the AIF generates. While most of the AIFs consider both management fee and profit percentages, a few are disrupting the market by not taking any management fee and only charge a profit share. One such example is True Beacon.
True Beacon is an asset management company in the Alternate Investment Fund space which aims to disrupt the market by adopting a zero upfront fee and only profit-sharing model. A Category III AIF can go long (profit from gains) and short (profit from corrections) in the market. The fund does not charge any administrative or management fees, restricting itself to a ‘carry’ of 10%. This means that 10% of the gains made by the fund would be paid to the fund manager, bringing down the post fee return to about 36%. AIFs have a minimum investment amount of ₹1 crore. Data on returns of other Category III AIFs is patchy. However, the return posted by True Beacon is higher than all other Category III AIFs reported by PMS-AIF World in its November performance report.
The Disruptive Revenue Model:
True Beacon is a long short fund and a long only fund. There are two buckets in the fund; 50- 60% is a long only passive bucket. The balance is a long short fund. Typically for funds like theirs, AIFs charge a 2 and 20 fee model, which is 2% asset management fee and 20% carry. They have removed the asset management fee completely and we are only charging the carry but we have reduced the carry to 10%. There will be no other fee as there will be no middlemen, no distributors. It is direct to clients only.
It employs a hybrid strategy. On average, it allocates about 65% of capital towards long-only, large-cap equity, and 35% towards long-short, derivative strategy. The 35% serves two primary purposes: one is to hedge the long-only portfolio; and the second is to generate alpha over shorter market cycles. Cat-III AIFs are the only pooled investment vehicles in India that are legally permitted to short the market, and this gives them an advantage over structures like PMS [portfolio management services] or mutual funds that rely purely on equity to generate gains. They dynamically adjust the portfolio allocation according to market conditions, allowing them to capitalize on volatility in the markets. In March and April, when the Covid-19-induced volatility triggered a massive crash in the equity markets, we were able to cushion a significant portion of that blow by allocating more capital towards the long-short component and betting on the market falling.
Performance Of The Fund:
Nikhil Kamath, Co-Founder and CIO of True Beacon and Zerodha, today announced full-year results for True Beacon’s flagship fund. True Beacon One, which invests in Indian capital markets, recorded an outperformance of the NIFTY50 benchmark by 26.6%, against the fund’s target of 6 to 8%. The annualised returns for the fund were 29.7% from September 2019 to August 2020 inclusive. True Beacon’s first year performance, at 29.7% annualised return, has established it as one of the leading Indian hedge funds. By contrast, the August 2020 Eurekahedge India Long-short Equities Index, broadly illustrating the competitive landscape, shows an annualized return of 7%.
When asked Mr. Nikhil Kamath, Founder, as to how they plan on making this model work, he replies, It has been an opaque industry. A typical CAT-3 AIF will tell your NAV once in a month, and they will do it by virtue of a relationship manager telling you or them sending you an excel sheet with performance. We built a dashboard which shows the performance of the fund on a daily basis. So every day you can log into your own dashboard and see what the fund is doing. If you want, you can withdraw or add money on your own. At True Beacon, we are not really focused on making profits. We want to make better the asset management space for ultra HNIs, which has not changed in last 10-20 years. So far as profits are concerned, of course, it will not come in the first two-three years. If there happens a word of mouth publicity of our efficient model, new investors will come and corpus will grow. With significant scale, we’ll be able to earn profits.”