Equity-Oriented Long-Short Strategies — The Rules
SEBI permits three equity-oriented SIF strategies. This lesson gives each one's minimum equity holding, explains how the 25% cap on unhedged short exposure works alongside it, and shows why a short position can add to losses.
Long, short, hedged, unhedged
A long position gains if a price rises. A short position is the reverse: it gains when the underlying price falls and loses when it rises. In a SIF, unhedged short exposure may be taken only through derivatives, for example by selling a futures contract on a share.
A short derivative position is a hedge when it offsets something the portfolio holds. It is unhedged when it does not: the strategy is then taking a view that a price will fall.
Three strategies, three floors
An Equity Long-Short Fund must hold at least 80% in equity and equity-related instruments. An Equity Ex-Top 100 Long-Short Fund must hold at least 65% in equity of stocks outside the top 100 by market capitalisation. A Sector Rotation Long-Short Fund must hold at least 80% in equity of at most four sectors.
In the mutual fund categorisation the top 100 companies by market capitalisation are the large caps, so the Ex-Top 100 floor is in companies ranked below them.
The short side
Each strategy may take unhedged short exposure only through derivatives and only up to 25% of net assets. This is in addition to derivatives used for hedging and rebalancing.
The rule takes a strategy-specific form in two cases. In the Equity Ex-Top 100 Long-Short Fund, unhedged short exposure may be taken only in stocks other than large caps. In the Sector Rotation Long-Short Fund, short exposure applies at the level of a sector; this lesson does not detail how.
Because unhedged short exposure is capped at 25% of net assets, an equity-oriented long-short SIF strategy cannot hold unhedged shorts equal to its longs. With an equity floor of 80%, or 65% for Ex-Top 100, each of these strategies keeps substantial net exposure to equities. A 'market-neutral' design, whose long and short positions roughly cancel out, is not possible within these equity strategies.
What a short can do to returns
An unhedged short position loses money when the underlying price rises. If shorted shares rally, the short positions lose and the strategy's return can lag that of a fund holding only long positions.
So shorts can add to losses as well as reduce them, and no outcome is assured. SIF advertisements and promotional material must carry a warning that investments in a SIF involve relatively higher risk including potential loss of capital, liquidity risk and market volatility.
Rules at a glance
A short position when the price moves
- Assumptions for this example: an Equity Long-Short strategy has net assets of ₹100 crore. It holds shares worth ₹85 crore, keeps the remaining ₹15 crore in cash, which creates no exposure, and has unhedged short positions, through futures on several companies' shares, worth ₹12 crore in all. Costs are ignored.
- Check the rules: equity is 85% (at least 80%); unhedged short exposure is 12% of net assets (within 25%); gross exposure is ₹85 crore + ₹12 crore = ₹97 crore, or 97% (within 100%). The example gives no per-company holdings, so the 10% single-issuer limit is not tested here.
- Assume the shorted shares rise 10%: loss on the short positions = ₹12 crore × 10% = ₹1.2 crore, which is 1.2% of the ₹100 crore.
- Assume instead they fall 10%: gain on the short positions = ₹12 crore × 10% = ₹1.2 crore.
Result. The same positions take away or add 1.2% of net assets depending only on which way the shorted shares move. The price moves are assumptions for arithmetic, not forecasts.
Key points
- Equity Long-Short Fund: at least 80% in equity and equity-related instruments.
- Equity Ex-Top 100 Long-Short Fund: at least 65% in equity of stocks outside the top 100 by market capitalisation.
- Sector Rotation Long-Short Fund: at least 80% in equity of at most four sectors.
- Unhedged short exposure is allowed only through derivatives, up to 25% of net assets; a short position loses money if the underlying price rises.
Common misunderstandings
- 'Long-short' does not mean half long and half short: unhedged short exposure is capped at 25% of net assets.
- The Ex-Top 100 floor is 65%, not 80%: only the Equity Long-Short and Sector Rotation strategies have an 80% minimum.
- Shorting does not by itself reduce risk: a short position loses when the underlying price rises, so it can add to losses.
Questions people ask
Can an equity SIF strategy hold unhedged short positions equal to its long positions?
No. Unhedged short exposure is capped at 25% of net assets, against an equity floor of 80% (65% for Ex-Top 100), so the strategy keeps substantial net exposure to equities. Derivatives used for hedging sit outside this cap.
Does a SIF go short by borrowing and selling shares?
The framework allows unhedged short exposure only through derivatives. It does not name short selling through stock lending as a route for it.
Is an equity-oriented SIF strategy always taxed as an equity fund?
Not automatically. Equity-oriented tax treatment needs at least 65% in listed domestic equity shares, and derivative positions do not count towards that.
What this lesson relies on
- SEBI Master Circular for Mutual Funds, 20 March 2026, Chapter 21 (Specialized Investment Funds)
- SEBI Master Circular for Mutual Funds, 20 March 2026, Chapter 3 (categorisation; definition of large cap)
- Income-tax Act, 2025 (definition of an equity-oriented fund)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.