AIF category 3 -F&O Margin allowed?

Recently come across an info that AIF Category -3 funds are allowed to take only 50% margin on entire contract value not From NRML margin,(i.e for one lot margin= (15000*75)/2) is that true ? can anyone through some lights on this? @siva @nithin

As per the SEBI Circular (CIR/IMD/DF/10/2013) -

3.4 Prudential requirements

All Category III AIFs which undertake leverage, whether through investment in derivatives or by borrowing or by any other means shall comply with the following prudential requirements:

     i. For the purpose of arriving at leverage undertaken by an AIF, leverage shall be calculated as the ratio of the exposure to the Net Asset Value of the AIF.

     ii. Leverage shall be calculated as under:

       Leverage =Total exposure {Longs+Shorts (after offsetting as permitted)} / Net Asset Value (NAV)

     iii. The leverage of a Category III AIF shall not exceed 2 times of the NAV of the fund. i.e. If an AIF’s NAV is Rs. 100 crore, its exposure (Longs+shorts) after offsetting positions as permitted shall not exceed Rs. 200 crore.

Calculation of exposure and NAV

     i. The total exposure of the fund for the purpose of computing leverage shall generally be the sum of the market value of all the securities/ contracts held by the fund. The total exposure at any point of time will be a sum of exposure through instruments in both the spot market and the derivative market.

     ii. Exposure shall generally be calculated as below:

  1. Futures (long and short)= Futures Price * Lot Size * Number of Contracts
  2. Options bought= Option Premium Paid * Lot Size * Number of Contracts
  3. Options sold= Market price of underlying * Lot size * Number of Contracts
  4. In case of any other derivative exposure, the exposure is proposed to be calculated as the notional market value of the contract

     iii. Idle cash and cash equivalents shall not be included in the calculation of total exposure. Long put positions shall be considered as short exposure and short put positions shall be considered as long exposure. Short selling of a stock through SLBM shall be treated as short exposure. Temporary borrowing arrangements which relate to and are fully covered by capital commitments from investors need not be included in calculation of leverage.

     iv. Offsetting of positions shall be allowed for calculation of leverage for transactions entered into for hedging and portfolio rebalancing as provided in the circular No. MFD/CIR/21/ 25467/2002 dated December 31, 2002 and to the extent as specified in the circular.

     v. Sum of all exposures without offsetting transactions for hedging and portfolio rebalancing shall be termed as ‘gross exposure’ and the ratio of such gross exposure and Net Asset Value shall be termed as ‘gross leverage’.

     vi. Net Asset Value (NAV) of the AIF shall be the sum of value of all securities adjusted for Mark to market gains/losses (including cash and cash equivalents). The NAV shall exclude any funds borrowed by the AIF.

     vii. All the above restrictions/limits shall apply at the scheme-level.

For further reading, check this article.


Also, recently AIFs set up in IFSC (aka GIFT City) were exempt from these limitations -

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Just to add, by leverage they aren’t referring to intraday leverage that brokers offer.

If a fund is Rs 100 crore in size, the maximum exposure the fund can take any time is Rs 200 crores.

1 Nifty future = 15000 x 75 = 11.25 lks. So total number of Nifty futures that can be bought by this fund = 200crores/11.25lks = 1775 lots.

The margin for Nifty futures = Rs 1.65lks. Or in Rs 100 crore, you could potentially take 6060 lots. But it isn’t allowed. You can only take 1775 lots.

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If they hedge this position against say buying putoptions or selling next month futures, how would offsetting be apply here to calculate ‘Net exposure level ‘.

Secondly I want to ask how does typical hedge fund positions themselves in markets…for example if it has a short view on market or some stock , will it buy options or short futures or use SLB. I asked because in India OTC markets are not developed and we have less liquidity in majority of stocks and options to make substantially material positions .

Like this article says, that net exposure is a grey area. Many hedge funds don’t buy options because the most conservative view of options exposure is not the premium value but the contract value. Offsetting isn’t again very clearly defined. So most hedge funds make sure that their total exposure is never more than 2 times the fund value.

Most hedge funds typically trade futures since there is no liquidity in stock options. SLB market also isn’t liquid. OTC is illegal in India for stocks.

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