Under SEBI (Alternative Investment Funds) Regulations, 2012, which category of AIF encompasses funds that employ complex or diverse trading strategies, including leverage and derivative positions (such as hedge funds)?

[ A ]Category I AIF

[ B ]Category III AIF[ CORRECT ]

[ C ]Category II AIF

[ D ]Category IV AIF

Takeaway

Option B is correct: Category III AIF

Derivation

SEBI categorizes Alternative Investment Funds (AIFs) into three distinct categories: (1) Category I AIFs invest in startups, early-stage ventures, social ventures, SMEs, and infrastructure (venture capital, angel funds, social impact funds). (2) Category II AIFs do not undertake leverage/borrowing other than for operational needs (private equity, real estate, distressed asset funds). (3) Category III AIFs employ diverse or complex trading strategies and are permitted to utilize leverage and derivative exposures (hedge funds, PIPE funds). This tests AIF classifications. The common trap is confusing Category II PE with Category III Hedge funds.

Why the others fail

A — Category I AIF

Category I AIFs focus on economically/socially desirable sectors like venture capital, angel funds, and infrastructure.

C — Category II AIF

Category II AIFs comprise standard private equity and real estate debt funds that do not employ complex leveraged trading strategies.

D — Category IV AIF

Category IV does not exist under the SEBI (Alternative Investment Funds) Regulations, 2012 as SEBI defines only Categories I, II, and III.