Part 4 of 6 in the Specialised Investment Funds series: Part 1 · Part 2 · Part 3 · Part 5 · Part 6
In the last article, we saw that five different funds all call themselves "Long-Short" but look completely different inside. One has zero shorts. One has 31% gross short. The net long ranges from 69% to 100%.
The label tells you almost nothing. What matters is how a fund is running its short book, and specifically, whether those shorts are hedged or naked.
This single distinction changes the risk profile of the fund entirely.
Two Completely Different Reasons to Short a Stock
A fund manager might short a stock for one of two very different reasons:
Reason 1: To cancel out an existing long position
The manager holds 50,000 shares of Infosys in the cash equity portfolio. She is a long-term believer in the business. But she is worried that the upcoming quarterly results will disappoint, causing the stock to fall 10% over the next month.
So she sells a futures contract on Infosys — the equivalent of 50,000 shares — expiring next month.
Now she has:
- Long 50,000 shares in cash
- Short 50,000 shares via futures
Net exposure to Infosys: zero (for this month). Whether the stock rises or falls, her gains on one leg cancel her losses on the other. She has essentially removed Infosys's price risk temporarily, while continuing to own the shares.
This is a hedged short.
Reason 2: To profit from a stock falling
The manager has no position in Bajaj Finance. But she believes the stock is significantly overvalued and will fall 20% over the next six months. She has done the research. She is convinced.
So she sells a futures contract on Bajaj Finance, not because she owns the stock, but purely as a directional bet that the price will fall. She has no cash equity position in Bajaj Finance at all.
This is a naked short (also called an outright short or unhedged short).
Why the Distinction Matters
The two types of shorts have fundamentally different risk profiles:
| Feature | Hedged Short | Naked Short |
|---|---|---|
| Corresponding long? | Yes, same stock | No |
| Net exposure after shorting | Near zero | Fully short |
| What happens if stock rises | Long leg gains, short leg loses — wash | Pure loss |
| Purpose | Temporary risk reduction | Directional profit |
| Margin required | ~1.5% of notional | ~18% of notional |
The margin difference is dramatic. Exchanges recognise that a hedged position (long cash + short futures on the same stock) carries almost no net risk — if the short loses, the long wins. So the exchange charges only about 1.5% margin on the combined position.
A naked short has full directional risk. The exchange charges the standard initial margin of roughly 15–20% (varies by stock volatility). For highly volatile stocks, it can go higher.
This means a fund running a ₹100 crore portfolio can hedge ₹50 crore of existing equity with just ₹75 lakh in margin. But to run ₹50 crore in naked shorts, it needs ₹8–10 crore in margin.
Reading the Three Strategies in Our Funds
Let us look at three distinct approaches from our actual fund universe.
Strategy A: Pure Alpha Shorts — DynaSIF Equity Long-Short
DynaSIF holds 56 stocks on the long side and 6 short futures positions. The key detail: none of the 6 shorts correspond to stocks in the long book. The fund is short Kotak Mahindra Bank, Varun Beverages, and four other names — all of which it does not own in equity.
Every single short is a naked short. DynaSIF is not hedging its longs; it is making six explicit bets that these six companies will underperform.
The result: DynaSIF's net long is exactly 100%. The 9% in shorts is offset by additional long futures elsewhere. This seems paradoxical — how can a fund with 9% in shorts have 100% net long? Because it also runs long futures alongside its short futures. The longs and shorts in the derivatives book cancel each other out at the aggregate level, even though at the individual stock level, each is a directional bet.
DynaSIF's short book is entirely alpha-seeking. Each position is a calculated directional call.
Strategy B: Systematic Hedging — Arudha Hybrid Long-Short
Arudha Hybrid's short book tells a very different story. The fund holds 33 stocks in cash equity. When you look at its futures positions, you find the same 33 stock names, each with a matching short futures position.
This is not a coincidence. The fund has systematically hedged every single equity position with a corresponding short futures contract of similar size. The result:
- 31% gross short
- 69% net long
Why would you do this? If the futures short exactly matched the equity long, the net would be zero. But Arudha Hybrid is maintaining a partial hedge — the short futures position is smaller than the equity long in each case. So for each stock, the fund has a small positive net exposure.
The effect is to create a portfolio where the total equity beta has been deliberately reduced. Instead of behaving like a 100% long equity fund, it behaves more like a 69% long equity fund, but the composition of that 69% is from 33 carefully chosen stocks, each partially hedged.
In a falling market, this fund falls less than the equity index. In a rising market, it participates less than the equity index. But the relative performance between the stocks in the portfolio matters enormously — if the fund's 33 stocks outperform the ones it has shorted, the strategy works regardless of market direction.
Strategy C: Mixed Book — qSIF Hybrid Long-Short
qSIF Hybrid runs both hedged and naked shorts simultaneously. Examining its positions:
- Hedged positions: Four stocks where the fund holds equity long AND a corresponding short futures — Apollo Hospitals, HDFC Bank, ICICI Bank, and Kotak Bank. In each case the short futures is smaller than the cash equity, maintaining partial exposure.
- Naked positions: Three stocks where the fund has short futures with no corresponding cash equity — Bajaj Finance, Eicher Motors, and Varun Beverages.
The 7.61% naked short comes from those three stocks. The remaining ~16.4% is in paired (hedged) futures.
qSIF Hybrid is simultaneously doing two things: reducing market risk on its core holdings and making directional bets on three stocks it believes will fall.
The Visual Test
The fastest way to identify hedged vs naked shorts when looking at a fund's portfolio:
- List all short futures positions.
- For each short futures, look for the same stock name in the cash equity section.
- If you find a match: hedged.
- If you find no match: naked.
That is it. No calculation needed — just cross-referencing two lists.
Why This Matters When You Are Evaluating a SIF
When someone asks "is this SIF risky?", the right question is not "how much does it short?" but "what kind of shorts does it run?"
A fund with 30% in hedged shorts is actually reducing its market exposure in a disciplined way. It is more conservative than a 100% long fund — the shorts are acting as insurance.
A fund with 10% in naked shorts is running ten explicit stock-level bets. If those bets are right, it adds meaningful alpha. If they are wrong, it subtracts meaningfully.
Same headline gross short percentage, completely different risk profile.
In the next article, we will tackle the mystery of the money market: why SIFs hold 30–40% of their portfolio in TREPS and T-bills, and whether that money is sitting there as margin security or doing something else entirely.
Next: Part 5 — The Cash in SIFs: Margin Security or Active Investment? →
Data: March 2026 AMFI portfolio disclosures. Full research methodology →
Investments in mutual funds are subject to market risks. Past performance is not an indicator of future returns. This analysis is for informational purposes only and does not constitute investment advice.