Aditya Birla Capital

And
A Study on Alternative Investments in India: The Road Ahead.

SUMMER INTERNSHIP PROJECT REPORT

for
Post Graduate Diploma in Management - PGDM

Submitted by
Name: Dimplle .V. Parmani

Roll No.PG- 20- 085

Batch: 2020 – 2022

IES‟s Management College and Research Centre

Bandra (W), Mumbai
 IES‟s Management College and Research Centre
Bandra, Mumbai
MAY 2020 JUNE 2022

Student’s Declaration

I hereby declare that this report submitted to IES‟s Management College and Research Centre as
summer internship project report is my original work and not used anywhere for award of any
degree or diploma or fellowship or for similar titles or prizes.

I further certify that without any objection or condition subject to the permission of the company
where I did my summer project, I grant the rights to IES‟s Management College and Research
Centre to publish any part of the project if they deem fit in journals/Magazines and newspapers
etc without my permission.

Place : Mumbai

Date : 16/07/2021 ---------------------------------

Signature

Name : Dimplle .V. Parmani

Class : PGDM Finance

Roll No. : PG-20-085

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2
 Certificate from the Faculty Guide

This is to certify that the summer internship project report is a result of the bonafide research
work carried out by Ms. Dimplle V Parmani under my supervision and guidance. No part of this
report has been submitted for award of any other degree, diploma, fellowship or other similar
titles or prizes. The work has also not been published in any journals/Magazines.

Date: 16/07/2021 Faculty guide

Signature of the Faculty Guide: ______________

Name of Faculty Guide: Dr. Mrunal Joshi

Place: Mumbai
IES‟s Management College and Research Centre

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 INDEX

Executive Summary

CHAPTER 1 : 1 Executive Summary………...............5

: 1.1 Introduction to the Industry………....7

: 1.2 Introduction to the Project…………..9

: 1.3 Objectives…………………………..26

: 1.4 Methodology……………………….28

CHAPTER 2 : 2 Literature review……………………29

CHAPTER 3 : 3 Findings……………………………....39
3.1 Fund Comparison & Analysis………..49

CHAPTER 4 : 4 Conclusion & Recommendations ……52

APPENDICES : Annexures……………………………55

: Bibliography…………………………60

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EXECUTIVE SUMMARY

Innovation is among the most powerful forces that shapes human society. There has been a great
deal of financial innovation in recent decades. There are a large variety of investment institutions
making investments in several types of assets. Assets under management in vehicles classified as
alternative investments have grown rapidly since the mid-1990s. This growth has largely
occurred because of interest in these investments by institutions, such as endowment and pension
funds, as well as high-net-worth individuals seeking diversification and return opportunities.
Alternative investments are perceived to behave differently from traditional investments.
Investors may seek either absolute return or relative return from these investments. Alternatives
like Private equity are generally illiquid, entail high risks but at the same time yield good returns.

The alternative investment industry has grown to become an important part of the global
financial system and economy. The process of investing requires engaging with investment
banks, insurance companies, wealth and asset managers, rating agencies, exchanges, custodians,
and clearing houses. The outcome of the investments they make affect the funding levels of
pension funds, sovereign wealth funds, endowments and foundations, and the millions of
individuals on behalf of whom these institutions invest.

The industry proved resilient during the financial crisis and emerged stronger than before, but the
same cannot be said for the traditional financial sector. Governments across the world responded
by overhauling regulations governing the global financial system. It is too soon to fully tell how
effective they will be or what unintended consequences they will have.

India is predominantly a country that believes in savings and investments. However investments
in India are still at a very nascent stage when compared to developed economies. Indians are
overexposed to traditional methods of investing like cash and deposits. To some extent stock
markets and money market instrument investments are also increasing. A survey conducted by
DSP Blackrock on „Investor preferences, retirement planning and financial advice‟ suggests that,
Indians recognize the need to plan for retirement and have started to save specifically for it. But
they are concerned that they won‟t be able to live comfortably post retirement. This concern is
due to lack of knowledge of various investment options available that provides the right kind of
growth as per the investor‟s risk appetite.

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However with increasing financial knowledge and understanding, there is scope of improvement
in investments. Alternative investment funds include venture funds, private equity funds, hedge
funds, real estate funds, commodities and derivatives which can be used to spread the risk and
yet receive high returns. The importance of such products is being recognized in India and also
there is a need to inform more and more retail investors and other institutions about these
instruments.

Any privately pooled investment vehicle established or incorporated in India, in the form of a
trust or a company, an LLP or a body corporate. Such privately pooled investment vehicles may
collect funds from Indian as well as foreign investors in accordance with defined investment
policies.

This excludes family trusts, ESOP trusts, employee welfare trusts or gratuity trusts, holding
companies, etc. Also special purpose vehicles not established by fund managers and regulated
under a specific regulatory framework (e.g. securitization trusts) and funds managed by
reconstruction companies and registered securitization.

Each AIF also needs to be compliant with the applicable statutes, filing and audit requirements
depending upon the structure of trust, LLP or a company and not just consider the registration
and compliance requirements. A trust is the more favoured structure amongst the existing AIFs
in India, as there is minimal regulatory framework for such an entity and greater independence
for the management to formulate its own standards of governance.

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INTRODUCTION TO THE INDUSTRY

About Aditya Birla Capital: -

Aditya Birla Capital Limited (ABCL) is the holding company for the financial services
businesses of the Aditya Birla Group.
ABCL‟s subsidiaries have a strong presence across Protecting, Investing and Financing
solutions, ABCL is a universal financial solutions group catering to diverse needs of its
customers across their life stages. Powered by more than 22,500 employees, the subsidiaries of
ABCL have a nationwide reach with 850+ branches and more than 2,00,000 agents / channel
partners and several bank partners.
As of March 31st, 2021, Aditya Birla Capital Limited manages aggregate assets under
management over Rs. 3350 billion, has a consolidated lending book of approx. Rs. 606 billion,
and an active customer base of over 24 million, through its subsidiaries and joint ventures.
Aditya Birla Capital Limited is a part of the Aditya Birla Group, in the league of Fortune 500.
Anchored by an extraordinary force of over 140,000 employees, belonging to 100 nationalities,
the Aditya Birla Group operates in 36 countries across the globe.

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About Aditya Birla Sun Life AMC Ltd.
Established in 1994, Aditya Birla Sun Life AMC Limited (ABSLAMC) is a joint venture
between the Aditya Birla Capital Limited and Sun Life (India) AMC Investments Inc.
ABSLAMC is primarily the investment manager of Aditya Birla Sun Life Mutual Fund, a
registered trust under the Indian Trusts Act, 1882. Having total domestic assets under
management (AUM) of over to Rs.2.6 lakh crore for the quarter ended March 31, 2021,
ABSLMF is one of the leading Fund Houses in India based on domestic average AUM as
published by the Association of Mutual Funds of India (AMFI). ABSLMF has an impressive mix
of reach, a wide range of product offerings across equity, debt, balanced as well as structured
asset classes, sound investment performance and over 7 million investor folios as of March 31,
2021.
With a pan India presence across 280 plus locations, ABSLMF is committed to deepening
mutual fund penetration in the country. The company is ceaselessly working to enhance the
appeal of mutual funds across a wider set of investors and advisors across India. Part of this
effort includes introducing smart solutions, user-friendly services and conveniences which
simplify mutual fund processes with digitization for both – investors as well as distribution
partners. ABSLMF provides sector specific equity schemes, fund of fund schemes, hybrid and
monthly income funds, debt and treasury products and offshore funds.
Additionally, ABSLAMC has various other business lines such as Portfolio Management
Services, Real Estate Investments and Alternative Investment Funds. The Portfolio Management
Service is a highly customized service designed to seek consistent long term results by adopting
a research based, methodical approach to investing. The Real Estate Investment Advisory
(REIA) business is a platform that enables investors to access 'Real Estate Investments'
opportunities meant for investors on a private placement basis. Lastly, ABSLAMC also acts as
an investment manager to Aditya Birla Sun Life AIF Trust – I which is formed as a Trust under
Category III Alternative Investment Fund (AIF). ABSLAMC has its subsidiaries in Dubai,
Mauritius and Singapore.

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1.1 INTRODUCTION TO PROJECT:

Characteristics of Alternative Investments-

Alternative investments possess certain characteristics that are different from traditional
investments in many aspects. The most important distinguishing features of alternative
investments include striving to achieve absolute returns, active management of these funds, use
of complex investment strategies, high levels of volatility, low correlation to market indexes,
opportunities for portfolio diversification, the use of arbitrage and the manager‟s knowledge,
experience and professionalism.

1. Absolute Return:

The rate of return refers to the size of the profit earned from the investment to the value of the
capital employed. The main aim of these types of investments is to achieve absolute returns,
which means that they do not simply aim to achieve the level of profit determined by the set
benchmarks, but to achieve over and above the expectations of the designated benchmarks. An
alternative investment strategy should generate alpha returns. Alpha is considered to be the
active return on an investment and helps to compare the performance of an investment against a
market index or benchmark representing the entire market. The excess return received on a
particular investment relative to the return of the set benchmark index is the investment's alpha.
The absolute rate of return that those managing alternative investments aspire to achieve is often
an unlimited rate of return. This means that investment managers do not focus on market risk
measured by the beta coefficient, but focus on the returns i.e., alpha coefficient..

Alternative investments are characterized by a very wide range of investment opportunities that
offer multiple combinations of risk and return which are usually available in traditional
investments. The managements understanding of the importance and the different methods of
shaping the profile of risk and return in the context of alternative strategies is one of the key
aspects of alternative investments.

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 2. Active Management:

Portfolio managers may adopt active or passive management strategies depending on their
objective. The main goal of alternative investments is to gain absolute returns, which is usually
achieved through active management. It is basically a portfolio management strategy where the
manager makes specific investments with the goal of outperforming an investment benchmark
index. In order to do so the active managers need to exploit the market inefficiencies, widen the
investment scope, use their skills and expertise, drop index-relative constraints, and invest in a
greater number of stocks than a more conventional portfolio. Active portfolio managers construct
of a portfolio based on the assumption of financial market inefficiency. The most common
methods of active management are fundamental and technical analysis. Active investment
depends on expectations regarding the development of prices and rates of return from financial
instruments. The strategies are burdened with a higher risk compared with passive strategies;
however, there is an opportunity to achieve above-average investment returns as active managers
do not try to replicate the market index benchmark. Instead, they try to create a profile better
than the benchmark index. Active management strategies help reduce concentration and promote
diversification, reduce fluctuations in prices and value of the entire portfolio, minimize the risks
arising from the inappropriate selection of assets to the portfolio, maximize the opportunities of
returns.

3. Common usage of leverage:

Alternative investments often use leverage in order to maximize profit. However, this high level
of leverage used has its pros and cons. In the event of using investment strategies in the wrong
direction of price changes it will lead to a multiplication of losses. The use of leverage is
particularly associated with derivative instruments which are used as a part of the varied
investment strategies adopted in alternatives. In the case of traditional investments, leverage is
not used at all or is used at most to a very limited extent. Returns from traditional investments
result from the increase in prices of instruments in the future. In the case of alternative
investments, investors can make a profit even during price declines. This is mostly because of
the possibilities offered by derivative instruments.

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Through the sale of forwards/futures, as well as the use of appropriate strategies in options, it is
completely possible to gain in the event of a drop in market prices. Leverage has its inherent
risks attached however if applied in the right manner can achieve the highest possible returns out
of the investments.

4. Diversified Investment Strategies:

For decades investors have utilized traditional investments like stocks (domestic and
international), bonds, mutual funds, etc. to diversify their portfolios. But how much
diversification do these actually provide is a big question. Correlation is a statistical measure
used to gauge the diversifying effect of an investment added to a portfolio. Two different
investments with correlation of 1 move in the same direction, 0 does not move at all and -1
moves in opposite directions. Hence higher the correlation, lower the diversifying effect. For
many years, combining a variety of equity classes with varying correlations to market indices
and bonds did a good job of providing enough diversification. But what the investors did not
expect is that during times of market distress, these strong correlations would break down
significantly and extremely low interest rates further add to the amount of losses made.
Alternative investments unlike the traditional asset classes tend to perform counter-cyclically to
stocks and bond, help to hedge and protect against volatility and inflation fluctuations. The asset
allocation through alternative investment should optimally fulfill investment objectives. The
managers of alternative investment can apply sophisticated investment strategies which generally
should be long term in nature and should avoid ad hoc decision-making based upon short-term
factors. The successful implementation of an alternative investment strategy depends mostly on
an investment manager‟s skill and experience, the core investment objective and strategy and
good understanding of changing market conditions. The most significant impact on investment
results is made by proper asset allocation and capitalizing on the wide spectrum of investment
opportunities available in the market.

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5. Arbitrage Opportunities:

Alternative investments allow benefits to be gained from the use of arbitrage. Arbitrage is a
transaction whose goal is to gain a profit without risk by using inefficiencies in the market. The
most classic example of arbitral opportunity is the difference in the valuation of the same
security listed on various stock exchanges. Investors looking for easy gain will buy value on the
„cheaper‟ market, and then resell it where the valuation is higher. In this way they can earn not
from the movement of prices resulting from technical or fundamental analysis, but from the
normal lack of cohesion in current market conditions. The persons who conduct the arbitrage
occupy opposite positions in related markets, trying to make gains from pricing anomalies for
similar instruments. Arbitrage is a common strategy used in forwards and futures. A few hedge
funds are pure arbitrageurs. Historical studies often prove they are a good source of low-risk,
reliable, moderate returns. Price inefficiencies tend to be quite small in pure arbitrage and
generally requires huge turnover and leveraged investments of large quantities.

6. Two – Tier System of Rewarding Managers:

An important element with a significant impact on the functioning of alternative investments –

particularly hedge funds – is the association of managers with hedge funds through financial
participation in the fund as well as their investment skills that generate additional alpha.
However, the price to be paid for the hope of high profits is much higher margins including both
the initial commissions and interest commissions for the management of the investment
portfolio. A characteristic feature of alternative investment is the operation of a two-stage pay
system for managers. The management fee is deducted from the value of the rates of return
before their publication. The commission from the generated profit enables the establishment of
a strong relationship of fund managers with the fund. The fee for the achieved results is usually
paid after reaching a particular profitability threshold or after making up for losses in the fund
arising from previous periods. Hedge fund managers typically receive both fund management
payments and commission from the performance of the fund – also called incentive fees.

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Commissions for the achieved results are also one of the characteristics of alternative
investments. There are various models of commission structures, but the best known systems are
high watermark and hurdle rate.
A high watermark determines the highest level of a variable. In relation to the hedge fund
industry, the term is used in conjunction with managerial remuneration. It means that the
manager will receive positive performance fees if the market value of the funds exceeds a certain
established level. Therefore, when calculating the commission the net asset value (NAV) of the
fund in the current year is compared with the NAV of the fund in the previous year. The
commission is payable if the current NAV is higher than the historical maximum value of these
assets.
On the one hand, high water mark agreements are important from the standpoint of investors‟
interests because the incentive fees are paid only when certain conditions are fulfilled. On the
other hand, this mechanism may lead to managers taking a higher risk and to greater variance of
returns from such funds.

The hurdle rate is another well-known mechanism for incentive fees payment.
The hurdle rate is generally defined as minimum rate of return on investment. In the system of
remuneration of hedge fund managers it defines the level of rate of return that a hedge fund
should reach so that the managers could receive an additional commission. Therefore, this
mechanism provides commission to managers, based only on the achievement of performance
above a pre-established reference standard called a benchmark. Therefore, payment of
commission is made on exceeding the reference rate such as LIBOR (The London Interbank
Offered Rate) or another predetermined benchmark.

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7. Market Regulation:

Financial markets are subject to regulation for three reasons: to increase the availability of
information to investors, ensure the stability of the system and strengthen the control of
monetary policy. Therefore, it is important, on the one hand, to ensure the safety of investors and
other entities operating in the market, and on the other hand to create a legal framework
contributing to an increase in the stability of the entire financial system. The progressive
integration of financial markets makes necessary the continuous monitoring of trends occurring
therein as well as the adjustment of regulation to changing conditions

In most countries of the world, until recently, there was no precise regulation that allowed the
rules of the sector of alternative investments to be established.
Moreover, in most countries there was no supervision of the alternative investment segment by
financial market bodies. Alternative funds were entities that had no obligation to provide
information on performance results. Additionally, there was no regulation imposing an
obligation on the auditor to follow up the financial statements.

However the scenario has changed today. Alternative investment management firms worldwide
are subject to strict operational standards and organizational requirements such as conflicts of
interest and conduct rules, protection of client assets as well as prudential regulations on liquidity
and risk management. They are subject to strict operational standards and must meet
organizational requirements such as rules on conflicts of interest and market conduct. They must
comply with regulations that govern the protection of their clients‟ money. These firms also must
follow prudential regulations on liquidity and risk management.

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1.2 INTRODUCTION TO INDUSTRY

The institution of Alternative Investment Services (2006), engaged in services in the alternative
investments market, defined six categories which should help in understanding the structure of
individual products as well as facilitating the construction of modern diversified investment
portfolios.

 Hedge funds

 Funds of funds (FOF)

 Private equity/venture capital funds

 Commodities and Currencies

 Managed futures and investment programs

 Real estate investment (REIT)

 Structured and guaranteed products

`
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 1. Hedge funds:-

A hedge fund is not a single investment. It is a pooled investment structure setup by an

investment manager or registered advisor. It is a type of investment vehicle which could be an
offshore entity, limited partnership or limited liability company. It uses multiple strategies to
invest in various asset classes. The fund could invest in stocks, bonds, commodities, or real
estate. There are hedge funds that specialize in "long-only" equities, i.e., they only buy common
stock and never sell short. Some hedge funds invest in private equity, which means buying
privately held businesses, taking over such businesses, improving the overall functioning, and
arranging an initial public offering (IPO) for the same. There are hedge funds trading in junk
bonds (Junk bonds are high-risk and high-return corporate bonds, issued by fiscally unsound
companies). There are some hedge funds that invest in real estate. There are also some hedge
funds that invest their money in certain specialized asset classes. These include patents and
music rights, etc. Simply stated, hedge funds can specialize in almost anything and everything.

The hedge funds investors are usually high net worth individuals or institutions. These investors
are also known as 'sophisticated investors'. Sophisticated investors have both the knowledge and
experience necessary to evaluate and understand the risks and merits of an investment.

Hedge funds are mostly open end funds and permit additions or withdrawals either, monthly or
quarterly. A hedge fund that functions as a limited partnership must have a general partner (GP).
The general partner may be an individual or a corporation. The general partner serves as the
manager of the limited partnership, and has unlimited liability. The limited partners (LPs) serve
as the fund's investors, and have no responsibility for management or investment decisions. The
liability of these LPs is limited to the amount of money they invest for partnership interests. The
value of an LP‟s holding is directly related to the fund‟s net asset value (NAV)
Many hedge fund investment strategies work towards achieving a positive return on investment
irrespective of market movements (i.e., absolute return). Hedge fund managers usually put in
some of their own money in the fund they manage. The fund pays its investment manager or GP
an annual management fee and a performance fee as remuneration for managing the fund.

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A fund may be based on a single strategy or multiple strategies in order to provide flexibility,
risk management or diversification. Each fund can further be diversified. Funds could be multi-
strategy, multi-fund, multi-market, multi-manager or a combination of all of these. Hedge fund
strategies may also be classified as either market neutral or directional. Market neutral funds
have less correlation to overall market performance. They help neutralize the effect of market
swings. Directional funds capitalize on trends and inconsistencies in the market in order to have
greater market exposure. The hedge fund's offering memorandum, provides to the potential
investors information about vital aspects of the fund like the investment strategy adopted, type of
investment made, and the amount of leverage included.

For a portfolio consisting of huge quantities of equities and bonds, investment in hedge funds
provides diversification and reduces the overall risk involved in the portfolio. Managers of hedge
funds utilize the relevant trading strategies and instruments with the objective of lowering market
risks to generate risk-adjusted returns, consistent with investors' risk quotient. Hedge funds
mostly produce returns relatively uncorrelated with market indices. While hedging acts as a
technique of reducing the risk of an investment, hedge funds just like any other fund can never
be risk free. Fund managers however must employ extensive risk management strategies in order
to protect the fund and investors.

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 2. Fund of Fund (FoF):-

A fund of fund (FoF) is also referred to as a multi-manager investment. It is an investment

strategy in which a specific fund invests in other types of funds. This strategy invests in a
portfolio that contains different underlying assets instead of investing directly in bonds, stocks
and other types of securities.

An FoF may either invest in portfolios containing assets and funds managed by a single
investment company or it may invest in external funds controlled by other managers from other
companies.

The strategy involved in such a fund focuses on achieving greater diversification and allocating
assets properly. It involves with investments in a variety of fund categories, consolidated into
one single fund. Such FoFs attract small investors who want to get better exposure with fewer
risks compared to directly investing in securities.

Investing in an FoF also provides investors exposure to diversified portfolios and varied
underlying assets even with limited capital availability, Investing in general traditional assets do
not provide such benefits. Though FoFs provide diversification, help nullify the effects of market
volatility and provide decent returns, managerial fees involved are much higher than that in
traditional investment funds. These fees include all the fees charged by the portfolio's underlying
funds. The returns of fund of fund investments that remain after payment of fees to managers and
various taxes involved may generally be much lesser than profits that single-manager funds can
provide.

3. Private equity/VCF:-

Private equity is gaining importance today in the financial markets. But very few actually
understand the functioning and structure of these type of investments. Private equity refers to
funds not traded publicly and the investors investing in such funds are generally large institutions
or high net worth (wealthy) individuals as such investments require huge amounts of capital.

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A private equity investment is one where money is made available by private equity firm, a
venture capital firm or an angel investor for taking over or transforming a company. Each of
these set of investors have their own investment objectives, expectations, requirements and
investment strategies. It ensures availability of required working capital to a company to
facilitate expansion, restructuring of operations, management, and development.

Since the basis of private equity investment is direct investment into a privately owned firm, in
order to gain a significant level of influence over the firm's operations, quite a large capital
outlay is required. This is why larger funds with deep pockets dominate the industry.

Private equity investments are typically realized through one of the following avenues:

Initial public offering (IPO) – shares of the company are offered to the public, typically
providing a partial immediate realization to the financial sponsor as well as a public market.

Merger or acquisition – the company is sold for either cash or shares in another company or
combined with another company;

Recapitalization –Cash generated or debt or other securities raised by the company in order to
fund various activities of the organization is distributed to the shareholders and other private
equity funds.

Private equity firms adopt the following strategies:

I. Leveraged buyout:

Leveraged buyout, LBO or Buyout refers to a strategy of making equity investments as part of a
transaction in which a company, business unit or business asset is acquired from the existing
shareholders using financial leverage or debt capital. The companies involved in these
transactions are typically mature and generate operating cash flows. Leveraged buyouts involve a
financial sponsor agreeing to an acquisition without itself committing all the capital required for
the acquisition.

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This various financing structure benefits an LBO buyout offers are: (1) the investor has to
contribute a very minimal amount of capital by himself to fund the LBO, and (2) it provides
greater returns to the investor. The amount of debt used to finance a transaction depends on the
financial condition and history of the target company to be acquired, market, the credit lending
ability and willingness of lenders, the interest costs involved in such a buyout and the ability of
the company to cover those costs.

II. Growth Capital:

This refers to minority investments, in relatively mature companies that have a capital
requirement for expansion or restructuring activities, penetrating new markets or to ensure a
smooth acquisition of major firms without a change of control of the business. Companies seek
growth capital in order to finance a major change or to bring about a transformation in the
overall structure of the organization. These companies unlike venture capital funded companies,
are at a much mature stage. Such firms are able to generate huge revenues and operating profits.
However the cash requirements of such companies are high and they may not be able to arrange
for the required liquidity to fund major expansion, restructuring and other investment activities.
Thus acquiring growth equity is very essential in order to undertake necessary expansion,
product development, marketing, purchase of required materials and equipments and ensuring
smooth functioning of day to day business. The growth capital can also be used to rejig the
financial statements of a company, particularly to reduce the amount of leverage (or debt) the
company is utilizing. A Private investment made in public equity which is in the form of a
convertible or preferred unregistered security, or a registered security for sale are the various
forms of growth capital investments that are generally used in private equity funds.

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 III. Mezzanine capital:

This form of financing is a great technique used by private equity investors. It provides more
debt capital and reduces equity capital utilization to finance a leveraged buyout. Mezzanine
capital is usually used by smaller companies that do not have enough sources for leverage
because of the size of the firm. This type of private equity strategy facilitates such companies to
amass the required additional capital much more than what traditional lenders like banks are
willing to provide. Mezzanine debt holders have higher return expectations for their investment
considering the higher risk involved in such a strategy.

IV. Venture capital:

This subcategory of private equity refers to equity investments made in less mature companies in
order to fund a start-up or a new venture. It mainly focuses on early stage development, or
expansion of a business. Venture investment is usually made in ventures involving application of
new technology, new marketing concepts and new products. This basically involves innovative
start-ups that do not have a proven track record or stable revenue streams. Many entrepreneurs
do not have sufficient funds to finance projects themselves, and therefore they look for other
alternatives to acquire finances.

Venture capital is most relevant to businesses which require huge chunks of capital and cannot
be financed by cheaper sources like debt. Investors generally commit to venture capital funds as
part of a wider diversified private equity portfolio.

V. Angel funds:

Angel investors are a class of well-to-do investors, usually experienced industry folk who take
equity stakes in startups. They take very early-stage businesses under their wing. Typically,
institutional investors such as venture capital funds or private equity funds do not like to commit
capital to tiny businesses. Angel investors literally step in and provide finance where other
lenders would never put in their money.

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These funds pool money from many individual „angels‟ so that they can invest sizeable amounts
into start-ups and enjoy better negotiating power while doing so.

Angel Funds are authorized to acquire finance from as many as 200 investors. They can invest
lower amounts (₹25 lakh) in each startup, with shorter lock-ins (one year, instead of three).

VI. Others:

Real estate, infrastructure, energy and power projects, PE fund of funds, etc. are the varied
options available for private equity investors.

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 4. Commodities and Currencies:-

Commodities are raw materials that are sold in bulk, that are eventually used to produce other
goods such as oil for gasoline, cocoa for chocolate, wheat for bread, etc. Speculators typically
buy and sell commodities with options and futures contracts. Commodity derivatives include
both exchange-traded and over-the-counter commodity derivatives such as swaps, futures and
forwards. They act as a hedge against inflationary and other risks, help to take advantage of
arbitrage opportunities and diversify investment portfolios.
Currencies can be considered an alternative investment strategy since they are highly unlikely to
yield long-term returns if not actively managed. Hence, it is rare to find an institutional investor
make a strategic allocation to a currency portfolio in their asset benchmark. However, active
currency management allows currency managers to make profits from currency moves by
capitalizing on inefficiencies in currency markets.

Currency managers adopt fundamental and technical indicators to value currencies and their
movements. These strategies used by money managers have proven to be profitable over the last
decade.

5. Real Assets:-

Real assets can be seen as those tangible physical assets that produce income and, typically, only
wear out over time, whilst financial assets provide claims on the income produced by underlying
real assets. Listed real estate securities, including listed REITs, over the long term reflect the
performance of the underlying real estate. Listed real estate plays a vital role as a proxy for direct
real estate, as a more liquid element, notably for funds aimed at retail investors, and as a strategy
to access particular sectors or properties. There are a variety of ownership structures that provide
exposure to real estate. Investors invest in these real estate funds in order to diversify their
portfolios and achieve returns.

Infrastructure investments are considered to be a part of real assets in the context of strategic
asset allocation. One definition of real assets is that such assets provide some type of inflation
protection. The addition of real assets improves portfolio performance and provides
diversification benefits of listed infrastructure and listed shipping companies, greater than that
provided by commodities and listed real estate companies. Thus real assets are considered to be
alternative investments.

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 6. Structured and guaranteed products:

A structured product is a combination of two or more financial instruments that comprise a

single structure. It is a single package consisting of a combination of an interest rate-linked
product and one or more financial derivatives. The financial derivative is referenced to one or
more underlying assets: Stock indexes, shares, exchange rates, interest rates. The incorporation
of the financial derivative to the structured product as an integrating part thereof, allows
benefitting from a fixed or variable profitability till maturity. There is a specific risk involved
over the life of the product. Based on the level of risk at maturity, we will make a division:
Structured capital-guaranteed products: Those that guarantee the return of the original amount
invested at maturity. This category includes Structured Deposits. Structured capital-at-risk
products do not guarantee capital repayment at maturity. The returns depend purely on the trend
of the underlying assets.
Thus, structured products on the basis of their nature and assets in which they invest and risk
appetite of the investor ensure varied offerings, provide exposure to different markets or
underlying products.
Today, structured products are considered to be one of the most appealing products available in
the alternative space. In the current scenario structured products are the right option for those
who want to optimize and diversify the profitability of their savings. The flexibility at the time of
producing them allows adjusting their characteristics to the customer‟s investor profile.

However, investors need to keep in mind the fact that these products are highly complex, risky
and difficult to understand for the customers. Another striking characteristic of these products is
that they cannot be traded in secondary markets which puts restrictions on their liquidity.

7. Managed futures:-

Managed futures is a 30-year-old industry. It consists of professional money managers usually

known as "commodity trading advisors" (CTAs).

24
These CTAs manage their clients' assets using a proprietary trading system by investing in
futures contracts. These investments are generally made in equity indexes, commodities, foreign
currencies or government bonds.

Over the years investments made in this type of alternative category has shown returns that has
more than doubled and is expected to grow further in the coming years.
One of the major benefits of entering into the segment of managed futures is its ability to lower
portfolio risk by means of negative correlation between various asset classes. For example if
certain stocks or bonds underperform due to rise in inflation, certain managed futures programs
might outperform in the given market scenario. Thus diversifying into managed futures along
with other asset classes helps to achieve optimum portfolio and allocate capital wisely.

25
 1.3 OBJECTIVES

The main objectives of conducting a study on this topic are:-

1. Understanding the various types and categories of alternative investments and the risk
involved-
Every investment product which is not a traditional investment vehicle like stocks, bonds or cash
is considered to be an alternative investment. Alternative investments spread across a wide
spectrum of products.
Gaining an understanding of these different types of products is crucial to understanding how
each of it works and helps to capitalize on the various benefits it claims to provide like
diversification, improved returns, etc.
However there are also certain inherent risks associated with these products which need to be
accounted for when understand or investing in such a market.
With proper risk mitigation and an appetite for possible risk, alternatives are the best choice in
order to diversify and gain the maximum out of one‟s portfolio.

2. Analyzing the regulatory aspect of alternative investments in India and abroad-

There are various regulatory bodies worldwide that control the functioning of the alternatives
world. These regulations ensure that such high risk products do not cause a downfall in the
financial markets and when invested in appropriately they provide the best results. Alternative
investments in India are classified into 3 broad categories in order to apply certain rules and
regulations to ensure smooth functioning of this market.

26
Lack of proper regulatory framework, lack of proper awareness about the products and the risk
involved probes people to believe that such non-traditional investments are disastrous. This
notion is not necessarily true. So understanding the existing regulations and formulating better
rules to overcome loopholes is vital.

3. Evaluating and comparing the performance of various types of alternative investment

funds in India and across the world-

A host of products are available in the alternatives universe. These investments perform
differently in different regions. In India even today alternatives are at a very nascent stage when
compared to developed economies like the US and Europe.
So the aim is to compare the performance of Indian alternatives with that of such economies in
order to reach their level of performance and help Indian investors earn better returns.

4. Estimating future scope of Alternative investments in India-

Alternatives is a growing investment category. It still being at a primary stage in India, there is a
lot of scope for the market to grow. There is a need to create more understanding amongst
investors about these investments.
However is this some sort of a growing bubble? What if the bubble bursts? All these questions
need to be answered. This study will help us gain an insight on the future scope of alternatives in
India.

27
 1.4 RESEARCH METHODOLOGY:

The main aim of conducting this study is to understand what are alternative investments and how
they function. Since a primary research was not feasible given the pandemic situation, I have
conducted a secondary qualitative research.

In this case, a Descriptive Research and Casual Research Design study was used to study the
various aspects of the alternatives market and it‟s growth in India. Descriptive research facilitates
the study to obtain accurate and complete information regarding a concept or a situation or a
practice.

This project is a descriptive study and is purely based on facts, figures and data, collected from
various research articles from journals, magazines and websites especially from top corporates
associated with alternative investments. Further latest contributions of various experts on the
subject have also been referred.

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`

LITERATURE REVIEW:

Some investors still think of alternative investments as an exclusive, narrowly defined class of
investments, but that‟s far from the truth. Alternatives come in different packages, include a wide
range of assets and strategies and are easily available to almost all investors. Alternatives are
powerful tools that can help to diversify one‟s portfolio, increase volatility and achieve greater
returns. There are a large number of investment institutions investing in different types of assets.
Also new varieties like angel funds have entered the market which are not a part of existing
regulations. Hence this class of investments which are different from traditional investment
institutions are classified as Alternative Investment Funds. The necessity for categorizing these
institutions is because they do not come under the purview of the current regulations followed by
traditional investments. Every financial entity should be well regulated for the overall safety of
the financial system as well as growth of the economy. Alternative investments like hedge funds
and private equity funds help provide asset managers with diversification benefits. Moreover,
they attract investors by promising higher returns and improve overall market liquidity as well.

The increased attractiveness towards alternative ways to invest capital was particularly visible in
the period of 2000–2003. This period was characterized by a tendency towards reduction in
prices in financial markets. The FED policy of cheap money made available in the United States
from 2000 caused a severe fall in interest rates to the lowest level over the past 40 years. This
decrease in short term interest rates to 1 % in the U.S. in 2000-2003, and a decrease in the
interest rate of bonds below 4.2 % in 2005 led investors to seek forms of investment offering a
chance to achieve higher returns. Also an interest in investments that enable effective
diversification of the investment portfolio in order to spread out the risk was increasing. The
increasing investor interest in the subject of alternative investments was also fueled by the global
financial crisis in 2007, which provoked an analysis of its causes. It would be unfair to say that it
was caused by financial innovation. In fact, innovations are, and will be an integral part of the
international financial market.

29
Due to the growing interest of investors investing in the international financial market interest in
alternative investment strategies has also increased radically. The first alternative investment
fund was created in 1949 by Alfred Winslow Jones. The sociologist used the method of short
selling, which allows investors to make money in the event of a fall in prices on the market by
selling off a hypothetical asset which is then repurchased at a lower price. Alfred Jones
combined both long and short positions in the management of the investment fund. The
sociologist assumed that a good selection of securities purchased allows profile above the
average rate of return, along with the use of leverage can multiply profits. Short positions in
the portfolio reduce the potential gains from the portfolio during a period of rising prices on the
market. However, they have the task of protecting the portfolio against losses were there to be a
reversal of the market trend.

Alternative Investment Funds are a class of investment entities that are not covered under the
usual SEBI regulatory framework for investment institutions. AIFs refer to any privately pooled
investment fund - a trust or a company or a body corporate or an LLP which are not presently
covered by any Regulation of RBI, SEBI, IRDA and PFRDA. They may be foreign or Indian. A
notable feature of AIFs is that they are tailor made investment arrangements like Private Equities
that aims to utilize investment opportunities. AIFs are thus private investment entities. An AIF
should have a minimum corpus of Rs.20crores. Minimum investment size for an AIF is
Rs.1crore. However, if investors are employees/directors of the AIF or employees/directors of
the Manager, then minimum investment value is reduced to Rs.25 lakh. Listing is permitted but
there is no compulsion for AIFs to list units on an exchange. An AIF cannot have more than
1000 investors in any scheme

The alternative investments industry is reshaping and, with this, new sources of capital are
emerging. Those new capital sources have significant effects on both the capital supply side – by
shaking up existing industry structures – and the capital demand side – by enabling products and
services that better meet the needs of new and existing customers.

30
 Global Regulations-

Before the global financial crisis, there were significant inconsistencies in how different
jurisdictions regulated alternative investment fund management firms. Some countries required
firms to register with the national regulator and report details about their activities. Other
jurisdictions were slightly lenient. After the crisis, policymakers and practitioners strove to
construct a global system of oversight and supervision capable of identifying stresses in the
financial system, and addressing them in a timely, effective and consistent manner. The goal was
to mitigate systemic risk and market melt-downs, and the related negative effects on the real
economy.

Various regulatory measures have been introduced since the global financial crisis. These
include:

The MiFID (The Markets in Financial Instruments Directive) is a European Union law which
standardizes regulation for investment services across all member states of the European
Economic Area. This directive has been effective since 2008 throughout the European Union.
MiFID has a defined scope that primarily focuses on over the counter (OTC) transactions. The
stated aim of the MiFID is for all EU members to share a common, robust regulatory framework
that protects investors. MiFID came into effect prior to the 2008 financial crisis. MiFID II aims
to regulate financial markets in the bloc and improve protections for investors with the aim of
restoring confidence in the industry after the financial crisis exposed weaknesses in the system.

The AIFMD (the Alternative Investment Fund Managers Directive), governs operations of EU-
based hedge fund management firms. This directive regulates access to Europe for non-EU
firms and non-EU funds; EMIR (European Market Infrastructure Regulation), The EMIR was
established to govern the over the counter (OTC) derivatives market in the EU. It introduced few
guidelines and reporting requirements for derivative products how they should operate bilaterally
and centrally.

The Dodd-Frank Act, which ensures supervision and authorization of US-based hedge fund firms
and certain non-US firms by the US authorities .This act also lays down certain rules on the use
of derivatives and other financial instruments used by hedge funds and other alternative asset
classes;

31
FATCA (the Foreign Account Tax Compliance Act), a new tax mechanism for US citizens and
institutions that invest outside the US, which has global scope and relevance to hedge funds and
their investors;
The JOBS Act( Jumpstart Our Business Startups Act) in the US, which, has created the
potential for alternative investment fund businesses to excel in terms of market and
communications.
IFRS (International Financial Reporting Standards), IFRS are the global accounting standards
that determine how most companies and financial transactions are reported. A number of
standards, including those relating to collateral, were updated following the financial crisis.

These laws and regulations are broad in scope and affect most alternative investors across the
globe. Regulation of private pools of capital (AIFs) assumed significance with the financial crisis
of 2008. Managers of private pools of capital that employ substantial borrowed funds should be
required to register with an appropriate national regulator. The IOSCO Consultation Report on
Hedge Funds Oversight (June 2009), suggests that progress towards a consistent and equivalent
approach of regulators to hedge fund managers should be a high priority. The Task Force
recommended that regulatory oversight for hedge funds should be risk based, focused
particularly on the systemically important and higher risk hedge fund managers. IOSCO
therefore considers efficient checks of hedge funds in its list regulations to be complied by
Member Countries.

On 8 June 2011, the EU Parliament and Council came out with a definition for AIFs. As per this
definition, unlike the Indian definition, AIFs refer to collective investments that:

a. Raise capital from various investors, in order to invest it as per the set policies
with the aim of providing more benefits to the investors.
b. Are not required to be authorized by Article 5 of Directive 2009/65/EC that
applies to undertakings for collective investment in transferable securities.

In 2012, EU issued its additional Directive on Alternative Investment Fund Managers (AIFM)
such as Hedge Funds, Private Equity Managers, etc. for imposing certain restrictions on the
dealings of banks and other custodians with them.
Under the Private Fund Investment Advisers Registration Act of 2010, enacted as part of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010, the regulatory aspect of
hedge funds and private equity fund advisers was enhanced by the Securities and Exchange
Commission (SEC) in USA.

32
 History of AIF Regulations in India-

SEBI (Venture Capital Funds) Regulations (“VCF Regulations”) were framed in 1996 to
encourage funding to entrepreneurs‟ early-stage companies in India. However, over the years,
the Venture Capital Funds (VCF) route was being used by several other funds including Private
Equity (PE) funds, Real Estate funds, etc. This made it difficult to target concessions and
incentives specific to VCFs without enabling other funds to avail of such incentives or
concessions. Further, the investment restrictions placed on VCFs were not suitable for such
funds.

Hence, on one hand, there were a set of funds like VCF which required incentives and
concessions and were comfortable with consequent restrictions attached and on the other hand,
there were another set of funds like PE funds which did not require incentives and concessions
but required investment flexibility.

Further, since registration of VCF was not mandatory under VCF Regulations, all players in the
alternative funds industry were not registered with SEBI. Hence, there was a regulatory gap
which needed to be addressed.

The SEBI Board, in its meeting held on July 28, 2011, while considering the agenda on “Plan of
Actions for Compliance To Eight New IOSCO Objectives and Principles of Securities
Regulation”, approved the proposal for a clear regulatory framework for private pools of capital
which may, inter-alia, provide for a mechanism to monitor and assess systemic risks and risks to
financial market stability posed by the activities of such funds.

Taking into consideration the above, SEBI proposed a Regulatory framework for Alternative
Investment Funds on August 1, 2011 through the concept paper placed on SEBI website along
with the draft AIF Regulations which was kept open for public comments till August 30, 2011.
Through this concept paper, SEBI proposed to regulate all funds established in India which are
private pooled investment vehicles raising funds from Indian or foreign investors, excluding
Mutual Funds and Collective Investment

33
Schemes registered with SEBI. Further, any such pool of funds which is regulated by any other
regulator in India like banks, pension funds, etc. was also proposed to be excluded from the
purview of the proposed Regulations.
Based on the public comments, the revised Regulations were submitted for the approval of the
SEBI Board in its meeting held on 2ndApril 2012. The final Regulations were issued on 21 May
2012.
The AIF Regulations is an attempt to extend the purview of regulation to hitherto unregulated
funds, so as to ensure systemic stability, increase market efficiency, encourage formation of new
capital and provide investor protection.
SEBI in May 2012 had notified the guidelines for AIFs as funds established or incorporated in
India for pooling in of capital from Indian and foreign investors for investing as per a pre-
decided policy.
In 2014, SEBI decided that the promoters of listed companies can offload 10 per cent of equity to
AIFs such as such as SME Funds, Infrastructure Funds, PE funds and Venture Capital Funds
registered with the market regulator to attain minimum 25 per cent public holding.
As on March 31, 2016, 209 Alternative Investment Funds (AIF) have been registered with SEBI
with many more in the pipeline. The cumulative investments by the AIFs exhibited an escalation
of about 29.97%, recording investments in excess of INR 18,200Crore till the end of first quarter
of 2016. The AIF industry has been fast growing and with the recent amendment in exchange
control regulations with respect to AIF, it is expected to see a dramatic shift in the quantum of
investments made by AIFs.
An AIF can be established in the form of a company, a LLP or a trust, in accordance with the
relevant Indian legislations governing these types of entities.The most common structure to
establish an AIF (which was also the structure adopted under the Venture Capital Fund
Regulations) is as a trust, administered by a trustee company. The reason for the popularity of the
trust structure is that it is the most tax efficient of all the available structures. An additional
benefit of the trust structure is that the segregation of multiple schemes under the same
registration (within the same category) is easier to manage.

Managers of AIFs are not required to separately register with the SEBI. However, managers of
AIFs are required to meet the eligibility criteria under the AIF regulations. Additionally,
managers are required to intimate the SEBI in case of any material change in the information
regarding the manager which was submitted to the SEBI at the time of registration of an AIF.
Any change of control in the manager would require the prior approval of the SEBI.
34
There is no separate registration requirement for advisers to AIFs. However, other than certain
specific exceptions, all investment advisers providing investment advice are required to
separately register with the SEBI.
Under SEBI guidelines, AIFs are classified into three categories (Refer Figure 3-Annexures).
The SEBI rules apply to all AIFs, including those operating as private equity funds, real estate
funds and hedge funds, among others. Based on their impact on the economy and the regulatory
regime intended for them taking into account concerned exposure and risk, each of these
alternative investments are classified into the prescribed three categories.

Category I:

These AIFs are ones that can produce positive spillovers in the economy and for that they
get incentives from the government, SEBI or other regulators. Such funds generally invest in
start-ups or early stage ventures or social ventures or SMEs or infrastructure or other sectors
or areas which the government or regulators consider as socially or economically desirable.
They cannot engage in any leverage except for meeting temporary funding requirements for
not more than thirty days, and not more than four occasions in a year and not more than 10%
of the corpus e.g. Venture Capital Funds, SME Funds, Social Venture Funds and
Infrastructure Funds.

SEBI in June 2013 has approved a framework for registration and regulation of angel pools
under a sub- category called 'Angel Funds' under Category I- Venture Capital Funds.

Category II:

For these funds, no specific incentives and concessions are given by the government or any
regulator. They cannot engage in any leverage except for meeting temporary funding
requirements for not more than thirty days, on not more than four occasions in a year and
not more than ten percent of the corpus, same as specified for Category I AIFs. The
institutions under this category are: Private Equity Funds, Debt Funds, Fund of Funds and
such other funds that are not classified as category I or III. The institutions under this
category are: Private Equity Funds, Debt Funds, Fund of Funds and such other funds that are
not classified as category I or III.

35
Fund of Category II Alternative Investment Funds may invest in units of Category I or
Category II, provided they only invest in such units and shall not invest in units of other
Fund of Funds.

Category III:

These are funds that are considered to have some potential negative externalities in certain
situations and which undertake leverage to a great extent. This category includes Hedge Funds
that trade with a view to make short term returns. They employ diverse or complex trading
strategies and do leverage including investment in listed or unlisted derivatives. Such funds are
open ended/close ended and receive no specific incentives or concessions from the government
or any other Regulator. These funds are allowed to invest in Category I and III AIFs also
provided they only invest in such units and shall not invest in units of other Fund of Funds.
These funds are regulated through issuance of directions regarding areas such as operational
standards, conduct of business rules, prudential requirements, restrictions on redemption and
conflict of interest as may be specified by the SEBI.

36
 Guidelines laid down by SEBI:

Certain eligibility criterion and registration requirements are applicable for AIFs defined and
included under the AIF Regulations and therefore it becomes important to explore what an AIF
is.

Investors can be Indian, NRI or foreign. However, for angel funds, Investors should be angel
investors only

Minimum corpus should be Rs. 20 Crores for each scheme and Rs. 10 Crores for angel funds
Minimum investment by each investor should be Rs. 1 Crore, or Rs. 25 Lakhs (), as applicable.
There are however no minimum investment requirement on units of AIF issued to the employees
of the manager for profit sharing.
Maximum number of investors can be 1000 for each scheme and 49 in case of angel funds.
However, the industry demand is to bring up the number to 200, in case of angel funds, in parity
with the private placement provisions under the Companies Act, 2013

Category I and II AIFs can be close ended only, with a minimum tenure of three years, while
Category III AIFs can be both open and close ended.

The manager or sponsor shall have a continuing interest in the respective AIF, (a) of not less than
2.5% of the corpus (if Category I or II) and 5% of the corpus (if Category III), or (b) Rs. 5 Crores
(for each scheme) and Rs. 50 Lakhs in case of angel funds; whichever is lower. This has to be
brought in the form of investment in the respective AIF and such interest shall not be through the
waiver of management fees. Management fees is generally fixed at a certain percentage of the
corpus, annually, and/or carried interest, to provide further incentive to the manager.

37
Units of close ended AIFs may be listed on stock exchange, subject to a minimum tradable lot of
Rs. 1 Crore and such listing of AIF is permitted only after final close of the fund or scheme.

In addition to the above, the AIF Regulations prescribe general and specific investment
conditions for each category AIF and SEBI can also specify additional requirements/criteria for
all/specific AIFs. Upon contravention of any of the provisions of the AIF Regulations, including
the minimum corpus requirement as stated above, the penalties are as provided under the SEBI
(Intermediaries) Regulations, 2008, which include suspension or cancellation of certificate of
registration, debarment, etc.

Apart from the registration (Refer Figure 4-Annexures) and compliance requirements under the
AIF Regulations, each AIF also needs to be compliant with the applicable statutes, depending
upon the chosen structure of trust, LLP or a company. For instance, a company or a LLP has to
be registered with the Registrar of Companies and there needs to be 2 directors/designated
partner, one of whom needs to be resident in India. Apart from these, there are also filing and
audit requirements for a company and an LLP. As such, a trust is the more favoured structure
amongst the existing AIFs in India, since the regulatory framework governing trust structures is
minimal and allows the management independence with respect to formulating its own standard
of governance.

38
`

Taxation Guidelines for AIFs:

Category I enjoys the tax benefits of pass-through status and the Finance Act, 2015, extended a
pass-through status to Category II AIFs as a response to a long standing industry demand. What
it essentially means is that income on an investment fund (defined as a Category I or Category II
AIF), is exempted from tax and such income is chargeable to income-tax in the hands of the unit-
holder in the same manner as if the investments made by the investment fund has been made
directly by the unit-holder. It is specialized tax practice on handling the issues of liability of
withholding tax on the fund; differential treatment of unit-holders basis their residential status
and treaty advantages of non-resident unit-holders in certain cases; risk of income being
considered as income from profits and gains of business or profession, etc.

Overall, the AIF Regulations have been a welcome change and have been quite successful in
providing separate incentives and imposing separate obligations for the various categories and
subcategories of AIFs.

39
`

3. FINDINGS:

The analysis and findings are based on the reports compiled quarterly/monthly information
submitted to SEBI by registered Alternative Investments Funds and all such reports are available
on official website of SEBI. The global Alternatives perspective is taken from studies by BNY
Mellon and Blackrock.

Global Scenario:

BNY Mellon‟s new survey, conducted in partnership with FT Remark, reveals a bright outlook
for alternative assets. Investors are satisfied with the returns their alternative investments are
generating, and most investors are of the opinion that performance has either met or exceeded
expectations. Indeed, more than half of respondents expect allocations to increase over the
coming 12 months.

While investors are broadly positive about their experience of alternative allocations, they are
putting pressure on managers to improve. Fees remain an item under negotiation, and investors
are pushing for greater control and transparency. Fortunately, managers recognize the need to
meet these demands, through the use of new operational solutions and cutting-edge technology.

There is strong growth in the proportion of total corporate debt taking the form of bonds and
other debt securities. Overall, S&P forecasts the scale of net bank disintermediation will amount
to ~$1 trillion by 2018 in Western economies and another $2 trillion in China, India and other
countries, which creates a sizable opportunity for alternative investment funds seeking to expand
into the credit space.

The move from owning risk to syndicating risk can be seen clearly in the leveraged loan market.
Banks used to be the primary investor in such loans, but non-bank sources such as alternative
investors, CLOs, and prime rate funds now dominate the market , as underlying demand by
institutional investors has remained robust.
Alternative asset appetite is insatiable. Over half (53%) of respondents expect allocations to
alternatives to increase in the next 12 months.

40
`

Private equity has the highest share of institutions‟ alternative asset allocations and highest levels
of outperformance. But the rising stars are real estate and private debt, whose share of allocation
continues to grow.

Hedge funds hit back. After a period of disappointing returns, nearly two-thirds of respondents
say they are more positive about the prospects for hedge funds than they were a year ago.
Investors are speaking loudly. Institutional investors want more control over investment direction
and fees, as well as more transparency into where their money is going. 98% of managers say
that investor demands are leading them to focus on how technology infrastructure can help
support operational efficiencies.
Asset managers turn to tech. From big data to predictive analytics and the use of satellite
imagery, technology is set to be the key driving force behind the alternative assets industry in the
years to come.
A greater understanding between investors and fund managers, enabled by new technologies,
will take the industry to a new level and further establish alternative assets as mainstream
investments.

Indian Scenario:

The Table 1(Annexures) shows that the growth in funds raised over the 12 month period ended
31st March 2021 has averaged 7 per cent across the three AIF categories. Funds raised by
Category II and III AIFs have recorded annual growth rates of 9 per cent and 3 per cent,
respectively.

The total amount of capital raised cumulatively by domestic AIFs is Indian Rupees 230014.65
crores i.e., approximately US $30billion. This is a small but growing fraction (an estimated 8
percent) of the total private equity and venture capital invested in India when compared to the
international private equity and venture capital invested in India. This has a significant policy
implication in that policy measures need to be taken to grow the supply of domestic capital in of
the total annual private equity & venture capital flows in the country i.e. at least trebling from
current levels.) Private equity and venture capital is experiencing an upward momentum in
2021.Compared to $28.60 billion invested during 2020, it has reached $30 billion in the first
three months of 2021.

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Global investor investing in private equity and venture capital, referred to as limited partners,
have indicated their preference for investing in India. 106 limited partners were surveyed by
EMPEA in 2017.

Amongst 34 countries, India was ranked number one in 2017. In previous years India‟s rankings
were:

1st in 2017

2nd in 2016,

4th in 2015,

8th in 2014,

9th in 2013
The investments opportunities are still higher in category II and Category III and investors prefer
these categories, whereas the SEBI and government consider Category I as economically and
socially desirable and may offer concessions and incentives for this, but still no great impact of
such considerations visible as of now, it might happen due less opportunities available in the
market or lack of confidence among investors.

Nevertheless, with 221 private capital fund managers and 46 hedge fund managers based in the
country, the alternative assets industry is a small but growing space in India With GDP growing
at 7 per cent per annum, this is likely to deliver a compounded growth in Indian alternative assets
over the long term, as alternative assets participation rates in the economy converge on those of
more developed economies.

Private equity and venture capital (63 per cent) and infrastructure (77 per cent) are the most
prominent asset classes among India-based investors. Of the India-based institutional investors,
60 per cent invest in at least one alternative asset class. India has seen record jump in
investments over the last few years and especially in 2015, with the number of angel and VCF
investments rising to as many as 1,096 in 2015, up by 68% from 2014. It has also created a
strong culture of investment in India and has enabled structuring of the life cycle of each and
every stage of investment. Many angels have now moved up to creating a Category I funds.

42
It is imperative that the regulators recognize the industry demands of implementation of overall
global best practices, promoting on-shore fund management and unlocking domestic capital pool
through sectoral and regulatory intervention, amongst other things, for enabling the continuing
growth of AIFs.

The sharp growth in the AIF industry is largely on account of growing awareness among affluent
investors to invest their money in quality unlisted companies and high-yielding real estate
through venture capital funds or the private equity route although there is still a long way to go.

43
Impact of Regulations on Alternatives Ecosystem-

1. Market Liquidity
Alternative investors rely on liquidity in the market to operate. Hedge funds are good providers
of such liquidity. Also private equity investments and venture capital firms are highly dependent
on liquid capital markets to fund their activities. However with increasing regulations the market
has become more illiquid in several areas. New regulations imposed have significantly reduced
the amount of liquidity that banks provide to the market. The new regulations have led to more
derivatives being traded on central exchanges which require huge amounts of capital and
collateral. It is estimated that the industry is going to face a shortfall in collateral due to some
upcoming regulatory requirements of $4-5 trillion globally which can go up to $9 trillion.

2. Innovation

The new regulations seek to create a more robust and stable financial system that explicitly
should be more “boring” than in the past. In doing so, they may impair the ability of the
traditional financial sector to attract the talent required for innovation. Asset managers and
recruiters have identified a significant shift in talent from investment banks towards stand-alone
asset managers. The decline in the quantity and quality of fresh talent flowing into the banking
sector may also reduce the degree of innovation that takes place within the alternatives industry.

3. Operational cost

The cost of operating an alternative investment firm has increased as a result of regulatory
changes and demands by LPs and regulators for greater transparency into the risk and
performance of GP‟s. Adhering to the new reporting and operational requirements set by
regulators and desired by LPs will increase the cost and complexity of operating in the
alternative investment industry. Meeting all of the requirements is a costly endeavour,
particularly affecting small firms and those seeking to enter the industry.

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 4. Barriers to entry

The increasing demands of institutional investors make it difficult for new funds to grow, as the
investors expect the firms to invest in an extensive institutional architecture before they are
willing to invest with them. The result is a threshold high enough that expects all funds receiving
institutional capital to meet all the existing and new regulatory burdens.

5. Access to capital

The new financial regulations and proposals are reducing the ability of small and medium sized
enterprises (SMEs) and infrastructure providers to obtain the capital they require for their
operation. Banks and some institutional investors are incentivized by new laws to reduce the
capital they provide to such investments. The changes are also affecting the alternative
investment industry, because the laws create new hurdles for some types of firms while it
enhances opportunities for others.

6. Returns

The impact of new regulations, in the absence of constant innovation by the alternative
investment industry, is likely to reduce industry returns. Transaction, operating, and
administrative costs are likely to increase differently for different asset classes. Hedge fund
returns will suffer the most due to their trading related activity.

45
 Implications for alternative investment firms (GPs):

A wide variety of regulations and laws have been laid down to supervise the functioning of the
GP as demanded by the LPs. This helps to achieve greater transparency in the operations of the
GP, create better relationships between GPs and LPs and improve trust levels of public in the
alternatives industry.

However certain negative implications may also be seen due to these regulations. Hedge funds in
particular will be affected to the maximum level as they will face higher transaction, operational
and compliance costs as well as reduced access to liquidity and funding.

Private equity, though not as much as hedge funds will be affected to a certain extent due to
these regulations. The most immediate impact is improved transparency. The highest impact will
be on the profitability of the GPs. Private debt will become one of the fastest growing segments
within the alternatives universe and low liquidity in private equity will be further reduced
locking up capital in the fund.

Implications for alternatives investors (LPs):

The effect of the new regulations on LPs may be mixed. However they might mostly prove to be
beneficial. The cost of investing will surge and LPs may find it difficult to access top GPs. They
may also see a reduction in expected returns and the overall diversification of their portfolios.

Lower management fees, greater transparency, and potentially deeper relationships with
preferred GPs are some of the benefits that the new rules may provide to certain LPs.

Large and sophisticated LPs that invest directly with GPs, such as pension funds and other
wealth funds, will benefit the most. Their size, sophistication and relationships will put them into
a favourable negotiation position.

46
Implications for the public:

Similar to other stakeholders, the public will benefit from the financial reforms, but there are
specific areas where certain groups may bear the unintended costs of the regulations. The public
may benefit from regulations that make the real economy more attractive to talented individuals.
These regulations may result in a more optimal balancing of talent in the economy.

With increase in transparency about reporting and fees structure of GPs, the net returns received
on investing the particular fund increases. LPs are in a better position to make investment
decisions and the public trust in the LP increases. Also the volatility is reduced to a great extent
which in turn benefits the public that invests in the LP as the fund achieves higher returns.

However new costs may also be incurred, the risk and cost of trading increases and the funds
become more illiquid affecting the performance of the fund.
There are 3 main factors which affect the future scope of Alternative investments in India

a) Regulations: For all three new sources of capital we examined in this report,
regulation was or is the major factor in the creation of growth of the capital flow. In the
case of startup capital, regulation of public markets keeps startups out of them longer and
pushes investors into private markets. And in the case of crowd platforms and private
debt, incentivizing less risk for traditional banks has spawned new players with more risk
appetite.

b) Changing demand for capital: As the macro environment evolves, demand for
capital evolves. Start-ups are a case in point: as starting a business becomes ever cheaper
and the need for funding is reduced, smaller checks are required for funding, which opens
the door for investors with smaller pockets. This has attracted high-net worth individuals
to create a whole industry of angel investors fueling seed and early stage venture funding
to meet this new type of demand for smaller rounds. Insight: Where capital destinations
develop demand for new forms of funding, investors will innovate to meet that demand.

47
c) Technology: Technology provides players on the demand, the supply side and
intermediaries between them with new capabilities. This is most obvious in the case of
crowd funding platforms, which have produced emergent behaviors on both sides. As
result, new products and services emerge that would not be possible without new and
emerging technology.

48
3.1 Fund Comparison & Analysis

Aditya Birla Sun Life Digital India Fund & ICICI Prudential Technology
Fund:
Aditya Birla Sun Life Digital India Fund

Investment Objective
A multi sector scheme with the objective of long term capital growth, through a portfolio of 100% equity
investments in technology and technology enabled/dependent companies.

This product is suitable for investors who are seeking

 Long term capital growth
 Investments in equity and equity related securities with a focus on investing in Technology,
Telecom, Media, Entertainment and other related ancillary sectors.

Sectoral/Thematic:

Fund has 89.73% investment in indian stocks of which 54.18% is in large cap stocks, 6.71% is in mid cap
stocks, 22.12% in small cap stocks.

Fund Performance against it’s Benchmark:

49
ICICI Prudential Technology Fund:

Investment Objective
A multi sector scheme with the objective of long term capital growth, through a portfolio of 100% equity
investments in technology and technology enabled/dependent companies.

This product is suitable for investors who are seeking

 Long term capital growth
 Investments in equity and equity related securities with a focus on investing in Technology,
Telecom, Media, Entertainment and other related ancillary sectors.

Sectoral/Thematic :

Fund has 91.19% investment in indian stocks of which 47.8% is in large cap stocks, 10.47% is in mid cap
stocks, 24.52% in small cap stocks.

Fund Performance against it’s Benchmark:

50
Fund Comparison:

ABSL Digital India Fund IPru Technology Fund

Period Invested for Absolute Returns Annualised Returns Absolute Returns Annualised Returns

1 Year 45.77% 94.34% 51.68% 107.73%

2 Year 95.23% 80.03% 110.90% 91.57%
3 Year 112.95% 55.77% 126.28% 60.89%
5 Year 159.17% 39.21% 173.58% 41.57%
10 Year 295.75% 25.93% 325.22% 27.26%

Risk Ratio Analysis:

Schemes Standard Deviation Beta Sharpe Ratio Treynor's Ratio Jensen's Ratio

ABSL Digital India Fund 17.38 0.82 1.56 0.33 11.12

IPru Technology Fund 19.22 0.85 1.52 0.34 7.87

Data Analysis:

Standard Deviation: It tells you how much the return from your mutual fund portfolio is straying from
the expected return, based on the fund's historical performance. The smaller the standard deviation, the
less volatile it is. The larger the standard deviation, the more dispersed those returns are and thus the
riskier the investment is. Here, ABSL Digitial India Fund has a smaller standard deviation and thus we
can say that it is more volatile.

Beta: Beta of a mutual fund scheme is the volatility of the scheme relative to its market benchmark. If
beta of a scheme is more than 1, then scheme is more volatile than its benchmark. If beta is less than 1,
then the scheme is less volatile than the benchmark. ABSLI Digital India Fund is less volatile than it‟s
competitor.

Sharpe Ratio: The Sharpe ratio is calculated by subtracting the risk-free return from the portfolio return;
which is known as the excess return. Afterwards, the excess return is divided by the standard deviation of
the portfolio returns. It is used to measure the excess return on every additional unit of risk taken. Any
Sharpe ratio greater than 1.0 is considered acceptable to good by investors. A ratio higher than 2.0 is rated
as very good. A ratio of 3.0 or higher is considered excellent. A ratio under 1.0 is considered sub-optimal.

Treynor’s Ratio: The Treynor ratio, also known as the reward-to-volatility ratio, is a performance metric
for determining how much excess return was generated for each unit of risk taken on by a portfolio. It is
assumed that the fund with a higher Treynor ratio is better at compensating you for risk-taking as
compared to the other fund, which has a lower Treynor Ratio. In our case, we see a very close
competition between the two funds. However, Ipru Technology fund will be considered for investment.

Jensen’s Ratio: The Jensen's measure, or Jensen's alpha, is a risk-adjusted performance measure that
represents the average return on a portfolio or investment, above or below that predicted by the capital
asset pricing model (CAPM), given the portfolio's or investment's beta and the average market return.
This metric is also commonly referred to as simply alpha. If the value is positive, then the portfolio is
earning excess returns. So, we can say that ABSLI Digital India Fund out-performed its peer.

51
 4. CONCLUSION

The financial industry is in the midst of implementing a series of regulatory reforms that, while
critically important for the security of the global financial system, will have intended and
unintended consequences for the alternatives industry. Major reforms in banking and financial
industry will impact the capital inflow in alternatives. Increasing transparency and firm
infrastructure regulations in the investment world will create barriers, increase costs and reduce
liquidity in the market. It is not easy for policy makers and regulators to foresee how a single
regulation will impact the alternatives industry as it is made up of a heterogeneous mix of global
players that adopt diverse strategies.The AIF Regulations are a significant step towards
comprehensive regulation of the Indian AIF market and may make it easier for investors to make
an informed decision when considering an investment in an AIF. It is interesting that various
terms that were previously subject to commercial negotiation and could be tailor-made have now
been prescribed by regulation, thereby creating a common standard across the industry. Though
the AIF Regulations impose additional regulatory and disclosure burden on the funds, it does so
in line with global best practices and are thus, a step in the right direction.

Regulators face particularly tough choices in balancing the management of risks made visible by
the global financial crisis against the more opaque risk that regulation will reduce the future
economic benefits flowing from alternative investing. Over the last three decades the economic
benefits flowing from alternative investments have helped to shape the global economy and the
industry is part of the solution to many of tomorrow‟s most intractable economic problems.

The SEBI has done a good job to provide very specific regulations, guidelines and criteria‟s for
different types of funds as per the risk-return prospective involved in the same and economically
and socially desirable prospects. It has also formulated various compliances to protect investors
but there has to be more specified elaboration in respect of various points needed to be framed as
investor will feel appropriately informed and less hesitant towards investing in such alternative
investment funds. Tax incentives in respect of various forms of funds has nothing new for them
irrespective of the category which they belong to and tax incentives are clearly defined for
venture capital funds only as before.

52
It is to be concluded that the alternative investment opportunities need to be enhanced and the
formalities to invest in such funds need to be reduced appropriately that more and more people
can invest and the people having good ideas and opportunities would not face the crisis on part
of finance and to manage these finances. The alternative investment opportunities have their
spillover effect on whole of the economy and hence help to increase the investment, productivity
and employment throughout the world.
The alternative investments provide more access to various schemes with flexibility and gives
number of options to investors to invest as per their risk appetite. Hence involving more and
more people into the investment opportunities and strengthening the financial system i.e., the
funds smoothly moving from surplus sector (those who are looking for the opportunities to
invest) to deficit sector (those who require funds), meeting the requirements of each other.
Government also plays a crucial role in this by encouraging such alternative investment
opportunities by providing various incentives and concessions in appropriate manner where the
Today, the alternative investment industry is truly global in both breadth and depth. More than
10,000 firms (Figure A5) mange some $7 trillion in assets under management (Figure A6). The
capital is invested across the globe in companies at every stage of development and in every
imaginable industry sector. The industry has expanded beyond the core and now includes a range
of additional asset classes. Some are specific to alternatives, such as secondary funds, which seek
to acquire stakes in existing alternative funds, while others utilize private equity style fund
structures and investment techniques to target traditional asset classes such as real estate,
infrastructure, or private debt.

With increasing financial know how, the need to invest in various asset classes has increased
amongst both classes and masses. This study will help in gaining a detailed insight into different
investment opportunities other than the traditional investments. It will also help retail investors to
make informed investment decisions.investments are needed for economic and socially desirable
purposes.

53
 RECOMMENDATIONS

Tax recommendations:

All the categories should have the pass-through benefit, from the current Category I and II of
AIFs. Investments by AIF and investee companies should be exempt from startup tax. Categorise
the income from AIF as „capital asset‟ instead of „business income‟ and subject it to Securities
Transaction Tax (STT) that which publicly listed securities enjoy. Losses at AIF should be
available for set-off for the investors. Investors in SEBI regulated angel funds should be
provided a tax deduction of up to 50% of the investment amount. Suitable safeguards to mitigate
misuse of the provision by non-financial investors / relatives of the promoter / promoter group
can be considered.The determination of fund management fees to be at arm‟s length will involve
a lot of subjectivity. Therefore, the condition of fund management fees to be at arm‟s length
should be deleted.

Include the concept of ‘accredited investors’:

The concept of Accredited Investors will simplify the process of determining who are eligible
investors in AIFs and will be a factor in ease of doing business. It will ensure that investors who
regard themselves as capably of identifying the risks consistent with their risk tolerance and
capacity, consider investing in AIFs.

Promoting FDI in AIFs:

Investment by non-resident investors in AIFs on a non-repatriation basis, TDS on distribution of

income to non-resident investors in AIFs to be in accordance with DTAA tax rates. Attract large
amounts of foreign capital into India-focused foreign funds by providing a safe harbour to
onshore managers of offshore funds. Unlock domestic capital pools such as charitable and
religious trusts to invest in AIF and other pools such as pension funds, insurance companies,
banks, single family offices and the like. Reduce the investment ticket size of INR 1crore to INR
50 lakhs. Promote On-shore Fund Management: Make Safe-harbour effective for managing
funds from India. The private placement process under the Companies Act requires a minimum
investment size of INR 20,000 of face value, which does not serve any purpose and should be
discarded

54
Annexures

55
`

Figure 2: General break up of investments in India

Alternative Investments are still the lowest. There is huge scope in this market

56
`

Figure 3: SEBI regulations as per the 3 categories of AIFs

57
`

Figure 4: Registration procedure to invest in alternatives

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 Table 1: AIF Category-wise Funding ( Amt. in Crores)

Absolute Rise Percentage Rise

Fund Raised Fun Raised
Category (31.03.2021- (31.03.2021-
(31.03.2021) (30.09.2020)
30.09.2020) 30.09.2020)

Category I

Infrastructure Fund 8819.26 8730.68 88.58 1%

Social Venture Fund 2463.47 2013.42 450.05 22%

Venture Capital Fund 13015.11 11712.71 1,302.40 11%

SME Fund 71.83 75.19 3.36 4%

Total of Category I 24,369.67 22532 1,837.67 8%

Category II 1,61,973.47 148099.16 13,874.31 9%

Category III 43671.51 42348.23 1,323.28 3%

Grand Total 230014.65 212979.4 17,035.25 8%

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`

BIBLIOGRAPHY


http://india-financing.com/sebi_aif_regulations_2012.pdf


https://www.sebi.gov.in


http://www.arthapedia.in/index.php?title=Alternative_Investment_Funds_(AIFs)


https://caia.org/sites/default/files/caia_level_i_chapter_1.pdf


http://www.proshares.com/media/documents/alternative_investments.pdf


 Growth of Alternative Investment Funds in India
By Chetan Yadav (International Journal for Research in Management and Pharmacy-
Vol. 3, Issue 5, June-July 2014, ISSN: 2320- 0901 33)



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
CTAs, Hedge Funds, and Funds-of-Funds By Liang Bing (April 2003)


Alternative Investment:
A Comprehensive view By  S. Veena
(IJEMR,Vol 5, Issue 5, May 2015)


 Alternative Investments: Definition, Importance and Risks
By Michael Skully (12th Melbourne Money and Finance Conference, May 2017)


Alternative Investments 2020: The Future of Capital for Entrepreneurs and SMEs
(World Economic Forum, February 2016)

Alternative Investments 2020: The Future of Alternative Investments (World Economic
Forum, 2015)


Alternative Investments as Modern Financial Innovations
By E. Sokołowska (Springer International Publishing Switzerland, 2014)


Anson, M. J. (2006). Handbook of alternative investments. New York: Willey

Alternative Investments Surge Ahead
By Chandresh Iyer, Frank J. La Salla (BoNY Mellon Corp., November 2017)

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