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Most of us who are worried about an imminent correction are not really talking about the onset of a bear market – rather, a short and possibly steep correction in an ongoing structural bull market. Here’s a closed ended equity fund that intends deploying an active hedging strategy designed for exactly such an outcome. Harsha takes us through the innovative downside protection strategy of the Kotak India Growth Fund – Series 4 and shares with us the scenarios in which the strategy can add alpha as well as those where it may not. Click here to download fund presentation of Kotak India Growth Fund – Series 4 WF: A unique feature of this closed ended fund seems to be an actively managed hedging strategy, using Nifty put options. Can you please explain how this differs from what we normally see in many other closed ended funds? Harsha: Most close-ended equity funds in the industry generally are either thematic or diversified funds. Kotak India Growth Fund – Series 4 intends to hedge the stock portfolio with a small portion invested in long dated Nifty 50 Put option. Not only that, but it also provides for a staggered unwinding of the Put positions if the markets were to correct significantly and reinvest the same in stocks at lower and attractive valuations. This strategy could help the fund enhance potential alpha in a scenario where markets correct significantly in the interim and then go up towards maturity of the fund. WF: While the upsides of your put strategy seem clear from your illustrations of different Nifty scenarios, what would you say are the potential downsides of this strategy? Harsha: The potential downside of our strategy is limited at maturity since we intend to hedge the stock portfolio using long dated Nifty 50 Put options. The only scenario when the fund could lose out is when the markets correct significantly and we unwind some Put positions in the interim and the markets remain subdued till maturity. If that is the expectation that investors are building up, then its best to stick to either long term SIPs only and/or increasing allocation to short term/credit funds on the fixed income side. This fund would be best suited for investors who are expecting bullish market in 3 years but are also cautious of risks in the short term and want to be prepared for any possible significant correction. WF: Do you envisage using put strategies in some of your open-ended equity funds to guard against downsides in this valuation rich market? Harsha: It is not practically possible to use long dated Put positions in open-ended funds since different investors with different entry points have different horizons. In open-ended funds, Put position can be used for hedging short term event risks sparingly. Whereas in a close-ended fund, all investors are coming with a definitive horizon (3 years in case of KIGF-4) , allowing the fund manager to hedge the entire stock portfolio from market risks through long dated Put option. WF: When you cast your initial portfolio using a multicap approach, which sectors and market cap sizes do you expect to focus more of your attention in and why? Harsha: This is a fund being a multicap fund has all flexibility to invest across sectors and market capitalisation categories. However, given the current relative valuation richness in mid/smallcap categories, we expect the initial portfolio to have a largecap tilt. WF: What dividend policy do you expect to follow in this fund? Harsha: Dividends are subject to availability of distributable surplus in the fund and Trustee’s approval. We will explore the possibility of announcing dividends as and when we have adequate surplus and we feel it is appropriate to declare dividends in the interest of investors. WF: What do you see as the key risks to this bull market? Harsha: Sharp upmove over last year with hardly any meaningful correction and high valuations could pose short term risk. We continue to remain constructive on Indian equities from a longer term perspective. Share this article |
