Hybrid Long-Short strategies gain traction in SIF market as investors seek better risk-return balance, says expert

Hybrid Long-Short strategies have emerged as the dominant category within India's Specialised Investment Fund (SIF) universe, accounting for nearly 70% of total SIF assets. However, investors should focus on the underlying investment strategy, net equity exposure and risk profile rather than recent returns alone, says Aditya Agarwal, Co-Founder of Wealthy.in.

What is a Hybrid Long-Short strategy?

A Hybrid Long-Short strategy is a category of SIFs designed to bridge the gap between traditional hybrid products and full equity funds. The strategy allows fund managers to simultaneously take long positions in stocks expected to appreciate while using short positions through derivatives to either hedge downside risks or generate additional returns, depending on the fund's mandate.

Unlike conventional hybrid mutual funds, where returns are largely driven by the allocation between equity and debt, Hybrid Long-Short funds actively use short positions as part of portfolio construction, making risk management more dynamic. Rather than targeting pure equity-like returns, these strategies generally seek a balance between return generation and downside protection.

Why are Hybrid Long-Short funds dominating the SIF market?

The category has become the largest segment within the SIF universe as investors increasingly seek products that offer greater flexibility than traditional hybrid funds without requiring full equity exposure.

According to AMFI's May 2026 data, SIFs managed assets worth ₹13,813.72 crore across 21 schemes and 56,749 folios. Of this, Hybrid Long-Short funds accounted for ₹9,709.38 crore, or roughly 70% of total SIF assets.

Agarwal says the growing popularity suggests investors are looking for strategies positioned between fixed income, arbitrage, equity savings, and balanced advantage funds. The appeal lies in the flexibility to manage risk and returns across varying market conditions rather than in product sophistication alone.

He adds that such strategies may suit investors with a medium-term investment horizon who already have experience with market-linked investments and an established core portfolio. However, they should complement, not replace, long-term equity and debt allocations.

Why the same category can mean very different strategies

One of the defining features of the SIF framework is the flexibility it gives fund managers in portfolio construction.

As a result, funds carrying the same Hybrid Long-Short label can pursue widely different investment approaches. Some may closely resemble arbitrage-plus or income-oriented strategies, while others may operate like equity savings funds or adopt dynamic asset allocation models similar to balanced advantage funds. This means that even though funds fall under the same regulatory category, their volatility, return potential, and overall risk profiles can differ significantly.

The use of short positions also varies. While some fund managers primarily use them to hedge market risks and reduce volatility, others actively deploy short positions to generate alpha by betting against stocks or sectors expected to underperform.

According to Agarwal, investors should therefore avoid comparing funds solely on recent performance, as strong short-term returns may simply reflect higher equity exposure or favourable market conditions rather than a consistently superior investment strategy.

Why net equity exposure matters more than headline returns

Agarwal says one of the first metrics investors should examine is net equity exposure, as it reflects the portfolio's actual directional exposure to equity markets after accounting for both long and short positions.

Two Hybrid Long-Short funds may belong to the same category but maintain vastly different net equity exposures, resulting in materially different levels of market risk.

For instance, a fund with relatively low net equity exposure may behave more like an arbitrage-oriented strategy, while another with significantly higher exposure could perform more like an equity-sensitive hybrid or balanced advantage fund. However, he cautions that returns should always be evaluated alongside the level of risk taken to generate them, as higher performance may simply reflect greater equity exposure rather than superior fund management.

What should investors evaluate before investing?

Agarwal says investors and financial advisors should look beyond category names and recent returns before selecting a Hybrid Long-Short fund. Some key factors to evaluate are the fund's investment objective and intended role within a portfolio, typical net equity exposure, whether the short book is used primarily for hedging or active return generation, how portfolio exposure changes across market cycles, and the benchmark and the fund manager's experience in managing long-short strategies.