Hedge fund strategy, mutual fund wrapper: Gaurav Mehta breaks down SBI MF’s hybrid long-short SIF strategy

Derivatives are often perceived as speculative and high-risk, but they can also be powerful tools for risk management. Speaking exclusively to Moneycontrol on the sidelines of SBI MF’s launch of its first fund under the SIF category — the Magnum SIF Hybrid Long-Short Fund — Gaurav Mehta, CFA, Head – SIF, SBI Funds Management, explained how the fund bridges the gap between traditional mutual funds and alternatives like PMS or AIFs.

Structured to benefit from the lower tax regime applicable to equity schemes, while leveraging strategic derivative usage and active risk management, the fund is designed to deliver superior returns compared to fixed-income and arbitrage products, while keeping volatility in check. This makes it a compelling option for investors seeking inflation-adjusted returns with lower risk.

Mehta, who has been with SBI MF since 2018, previously served as CIO – Alternatives, Equity, from 2021 before taking charge of the SIF equity business in July 2025.

Edited excerpts:

How does this SBI SIF Hybrid Long Short compare with conventional mutual funds and alternatives like PMS or AIFs?

It is very differentiated compared to conventional alternative platforms. There is a high degree of transparency, regulation, and tax efficiency, which PMS or AIFs often lack. In PMS, every transaction is taxed, whereas mutual funds offer better tax treatment. In Category 3 AIFs, derivatives are taxed at a maximum marginal rate of about 40%, making them less efficient. Our fund keeps ticket sizes lower, ensures regulation and transparency, and is structured for equity taxation. Compared to mutual funds, which have negligible derivative usage, this fund allows more flexibility, including unhedged shorts, enabling investors to express views on overvalued stocks or tactical mispricings that conventional setups cannot address.

Why did you choose the hybrid long-short category instead of a pure equity long-short category?

The perception is that derivatives imply speculation and high risk, but derivatives can also be used to mitigate risk. Hybrid funds serve as a “stepping stone” for investors transitioning from fixed income or arbitrage funds to equity exposure. Many investors are comfortable with arbitrage or fixed income but are cautious about moving directly into traditional hybrid funds. This fund provides an intermediate step, offering some equity exposure with lower volatility, structured equity taxation, and controlled risk, so investors can calibrate their comfort level before taking on more aggressive products.

How is the fund structured?

The fund is structured within the hybrid long-short category, which by regulation requires a minimum of 25% in equity and 25% in debt. In our case, we target a gross equity exposure of 65–75% to achieve equity taxation, while debt occupies the remaining 25–35%. Within this framework, we have some additional flexibility: for instance, up to 10% can be invested in REITs and other instruments. A key aspect of our strategy is managing risk through derivatives. A large part of the equity allocation, roughly 55–75%, is covered using derivatives, where we hold the stock, buy put options for downside protection, and sell call options to earn premium. Only a small portion, within regulatory limits, may remain unhedged to allow for opportunistic or tactical positions. This breakup allows us to generate equity-like returns while controlling volatility, providing a middle ground between conventional arbitrage and traditional hybrid funds.

Have you set a framework for positions and expected returns?

Yes, we have a framework to reduce downside risk while balancing upside potential. We buy puts to protect against downside and sell calls to earn premiums, effectively reducing variability by capping returns on both ends. The goal is to maintain a net premium inflow, ensuring a steady flow of income even in sideways markets. Most positions are hedged using derivatives, with only a small portion (up to 10%) reserved for opportunistic short-term trades, including merger arbitrage, event-driven strategies, or high-conviction bets.

How does the cost of this hedging strategy impact returns?

The strategy is structured so that the premium earned from selling calls often offsets the cost of buying puts. For example, if a stock is at Rs100, we might sell a Rs 103 call and buy a Rs 95 put. The net effect is usually a small income from premiums while downside is protected. Upside beyond the strike price is capped, but this tradeoff is intentional to maintain steady returns.

How are stocks selected for this fund?

The portfolio focuses on the F&O universe with sufficient liquidity. Stock selection is fundamentally driven, focusing on businesses with strong long-term potential. We avoid stocks with disproportionate downside risk. Selection also considers near-term triggers, tactical opportunities, and implied volatility. Higher option premiums on volatile stocks are desirable if actual volatility turns out lower than implied, creating favorable conditions for premium income. The ideal scenario is a stock with steady upward movement where premiums are earned without incurring significant risk.

How does this fund bridge the gap between arbitrage, hybrid funds, and more aggressive equity products?

This fund sits between arbitrage and conventional hybrid funds. Arbitrage offers low risk and tax efficiency but limited returns. Traditional hybrids carry more unhedged equity, so in a market downturn, losses can be significant. Our fund targets better returns than arbitrage with slightly higher variability, yet far lower risk than hybrids. It allows investors to gain measured exposure to equities, making it a practical stepping stone before moving to more aggressive equity strategies.