Hybrid long-short SIF vs arbitrage vs balanced advantage funds: How do they compare?

SEBI defines an arbitrage fund as "an open-ended scheme investing in arbitrage opportunities" with a minimum investment of 65% in equity and equity-related instruments. These funds try to generate returns from the difference in the price of securities in two markets. Since the positions taken by the fund managers are fully hedged, returns are largely independent of market direction.

Balanced advantage funds (BAF) aim to manage investment in equity/debt dynamically. The fund manager of a BAF scheme can shift between equity and debt based on market valuations, increasing equity exposure when markets are cheap and reducing it when valuations appear very high.

The hybrid long-short SIF requires a minimum investment in equity and equity-related instruments of 25% and a minimum investment in debt instruments of 25%, with a maximum short exposure through unhedged derivative positions in equity and debt instruments of 25%. The minimum investment threshold is Rs 10 lakh per investor.

In practical terms, arbitrage funds aim for near-zero volatility, balanced advantage funds aim for equity-like returns with lower drawdowns and hybrid long-short SIFs aim for alpha generation through directional bets and derivatives strategies, but with higher risk.

The paragraphs below look at two schemes from each of the three categories based on data from ACE MF. Please note the fund names below have been selected randomly for illustration only. The article doesn't intend to recommend any of these schemes for investment.

SBI Arbitrage Opportunities Fund (direct plan), with an AUM of ₹46,803.09 crore as of July 31, 2026, returned 6.84% in FY2025-26 and 7.83% in FY2024-25. Its standard deviation, a measure of volatility, was just 0.07, and its beta was 0.69. Edelweiss Arbitrage Fund (direct plan), with an AUM of ₹15,139.16 crore, returned 6.77% in FY 2025-26 with an identical standard deviation of 0.07. Both funds charge an exit load of 0.25% only if redeemed within 15 days.

The direct plan of HDFC Balanced Advantage Fund, with an AUM of ₹1,07,765.65 crore, returned -0.14% in FY2025-26 but 8.40% in FY 2024-25 and 40.01% in FY 2023-24. Its standard deviation was 0.61 and beta was 0.70, reflecting its higher equity exposure. SBI Balanced Advantage Fund (direct plan), with an AUM of ₹42,244.29 crore, returned 3.45% in FY 2025-26 and 7.74% in FY 2024-25, with a standard deviation of 0.46 and beta of 0.86.

The two hybrid long-short SIFs, both launched in October 2025, show different profiles altogether. SBI Magnum Hybrid Long Short Fund (regular plan), with an AUM of ₹3,799.50 crore, returned -0.39% in its first partial year, and its since-inception return was 5.79% till August 21, 2026. Edelweiss Altiva Hybrid Long-Short Fund (regular plan), with an AUM of ₹7,009.59 crore, returned 1.76% in FY 2025-26 and 10.46% since inception till August 21, ranking first among 11 funds in its category. Both SIFs require a minimum lumpsum investment of ₹10 lakh.

*On remaining units after free withdrawal limit

The table shows the key trade-off among three categories.

Arbitrage funds offer the lowest volatility (standard deviation of 0.07) and consistent 6-8% returns, but their upside is limited. Balanced advantage funds have higher volatility (0.46-0.61) but can deliver double-digit returns in bull years, as HDFC BAF's 40.01% in FY24 shows. The SIFs sit in between on volatility (0.21-0.23), with low betas of 0.19-0.22 suggesting they are less correlated to the broader market, but they require ₹10 lakh minimum and have limited track record.

For parking surplus cash, arbitrage funds remain the default choice given their low volatility and daily liquidity. For investors with moderate risk appetite seeking equity exposure with downside protection, balanced advantage funds offer a proven track record.

The hybrid long-short SIFs, with their ability to take short positions and use derivatives strategies like covered calls, may be suited for sophisticated investors willing to commit a minimum of ₹10 lakh and accept higher risk for potentially uncorrelated returns, but they are too new to have a proven track record.