Long-short funds bloom in GIFT City as tax sops tempt

Long-short funds, which aim to profit in both rising and falling markets, have found a fresh momentum in GIFT City.

- Srushti Vaidya

Stifled by high taxes at home, fund managers are shifting to India's offshore financial hub to take advantage of tax-free derivative income, unlimited leverage, and greater freedom to hedge globally.

The model is drawing keen interest, with 20 such funds having registered in GIFT City as of end July since regulations came in place in 2022. For perspective, India's more established domestic ecosystem only has around 32 such funds till now, according to data from PMS Bazaar.

While the hub offers advantages, the talent pool to run such complex strategies in GIFT City remains shallow, which could be a concern.

A long-short fund aims to make returns by buying long and selling short positions, aiming to profit in rising as well as falling markets. Long-short funds mostly trade in derivatives using index futures or options.

Long-short funds in India, which fall under category III Alternative Investment Funds (AIFS), do not enjoy tax passthrough status and could potentially be liable to tax on their derivative income at the maximum marginal rate which could be up to 39%, said Shikhar Kacker, a partner at Khaitan & Co.