Directional Strategy
Also written Dedicated-Long Strategy
A Category III AIF strategy that takes a net long or net short position on stocks or an index, betting on the market's direction; short-bias and dedicated-long are its variants.
In plain language
Some managers try to profit from picking stocks while staying indifferent to the market. Directional managers do the opposite: they take a view on where the market is heading and position the whole fund for it.
The workbook describes the strategy as delivering absolute returns by taking either a net long position or a net short position in selected stocks or a broad-based market index. The manager takes a call on the direction of the overall market, over the short term or medium to long term. With net long positions the fund benefits from an upward movement in the market, and vice versa.
It is, in the workbook's words, "an opposite of Market-Neutral Strategy": the manager does not aim for a portfolio beta of zero or close to zero.
How it works
Variants.
| Strategy | Positions | Net exposure |
|---|---|---|
| Short-bias | both long and short | net short to the broad market; benefits from a downward move |
| Dedicated-long | exclusively long | net long |
| Long-only | long; generally no short position at the time of investment | net long |
| Long-short | both long and short | may be net long or net short (a typical 130/30 is net long up to 100% of investable funds) |
Risk. Directional and short-bias strategies "may be volatile and risky, during major macro-economic upturns as well as downturns", depending on the net exposure taken.
The workbook's Example 4.
- Fund LMN — large-cap: buy Rs 5 crore of Company C, sell Rs 10 crore of Company D, net (Rs 5 crore); mid-cap: buy Rs 5 crore of Company E, sell Rs 7.5 crore of Company F, net (Rs 2.5 crore). Net short in both segments → short-bias strategy.
- Fund TGR — buys Rs 35 crore of Company H and Rs 30 crore of Company I (net Rs 65 crore long), plus NIFTY50 call options → directional, specifically dedicated-long; the fund profits if NIFTY50 rises.
The sample question. "A Dedicated-Short Directional Strategy … in which the investment manager exclusively takes buy positions only" is false — exclusive buy positions describe dedicated-long.
A worked example
Illustrative figures. Two Category III AIFs report their books on the same date (Rs crore):
Godavari Directional Fund
| Position | Long | Short |
|---|---|---|
| Banking stocks | 90 | 20 |
| IT stocks | 40 | 25 |
| NIFTY50 futures | 30 | — |
| Total | 160 | 45 |
Net exposure = 160 − 45 = Rs 115 crore long. The manager expects the market to rise; a 10% fall in the market would hurt the fund far more than a market-neutral fund of the same size.
Narmada Short-Bias Fund
| Position | Long | Short |
|---|---|---|
| FMCG stocks | 30 | 55 |
| Auto stocks | 15 | 40 |
| Total | 45 | 95 |
Net exposure = 45 − 95 = Rs 50 crore short. It holds some long positions, so it is not dedicated-short, but it maintains a net short exposure to the broad market and gains if the market falls.
Neither fund aims for a beta near zero. That is what makes both of them directional — and what makes each vulnerable if the market moves the wrong way, in an upturn for Narmada or a downturn for Godavari.
Why NISM asks about it
Chapter 7 (Category III AIF Investment Strategies and Due Diligence Process) covers directional and short-bias strategies at 7.1.4, including the dedicated-long variant and the Fund LMN and Fund TGR example, and one Chapter 7 sample question is on dedicated-short versus dedicated-long. Chapter 6's risk-adjusted return example includes a directional fund. Expect identification questions from a set of positions and questions on how directional differs from market-neutral.
Common exam traps
- Directional is the opposite of market-neutral: it does not aim for zero beta.
- Short-bias holds both long and short positions but stays net short. It is not the same as holding only short positions.
- Dedicated-long means exclusively long positions. The sample question's "dedicated-short … exclusively buy positions" is false.
- Long-only versus short-bias: long-only keeps a net long exposure; short-bias keeps a net short exposure.
- Long-short may be net long or net short, whereas short-bias must be net short.
- Directional funds are risky in upturns as well as downturns, depending on which way the net exposure points.
Check yourself
1.A Dedicated-Short Directional Strategy is a category of Directional Strategy in which the investment manager exclusively takes:
- a)buy positions only
- b)sell positions only
- c)equal long and short positions
- d)no derivative positions
Show the answer
Answer: (b) sell positions only
The workbook's sample question asserts that a Dedicated-Short strategy takes buy positions only and marks it False. It is the Dedicated-Long strategy that involves exclusively taking long positions, as against a long-short strategy where the manager may take both. A Dedicated-Short strategy correspondingly takes only sell positions. Option (c) describes a market-neutral approach, which is the opposite of directional.
2.A Global-Macro strategy differs from an equity-market strategy because it:
- a)takes positions only in currencies and commodities
- b)takes long and short positions across currencies, fixed income securities, equities, commodities, real assets and interest rate derivatives, selecting on macro-economic trends
- c)avoids leverage entirely
- d)may not be combined with a long-short or market-neutral approach
Show the answer
Answer: (b) takes long and short positions across currencies, fixed income securities, equities, commodities, real assets and interest rate derivatives, selecting on macro-economic trends
Global-Macro funds can take both long and short positions across asset classes such as currencies, fixed income securities, equities, commodities, real assets and interest rate derivatives, and the manager makes stock selection primarily on the basis of macro-economic trends and factors, instead of fundamental analysis of historical data of every company. Option (d) is expressly contradicted: the fund may apply a long-only strategy, market-neutral strategy, directional strategy or a long-short strategy within its global-macro scope — which is why Fund GMS was described as global-macro and long-short.
Where this is taught
Free preparation for NISM Series XIX-BRelated terms
- BetaHow sharply a share moves relative to the market index — beta 1 moves with the index, above 1 amplifies it, below 1 dampens it. The standard measure of systematic risk.
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Global-Macro StrategyA Category III AIF strategy taking long and short positions across currencies, fixed income, equities, commodities, real assets and interest rate derivatives, driven by macro-economic trends.
- Long-Short Equity StrategyA Category III AIF strategy that buys stocks the manager thinks are under-priced and shorts those it thinks are over-priced — often run as a 130/30 fund with 100% net market exposure.
- Market-Neutral StrategyA Category III AIF strategy taking equal long and short exposures within a sector, industry or market-cap segment so that portfolio beta is zero or close to zero.
- Short-bias StrategyA directional strategy in which the manager holds both long and short positions but keeps a net short exposure to the broad market, so the fund benefits when the market falls.
- Long-only Equity StrategyA Category III AIF strategy that takes only buy positions in selected stocks when investing, aiming at absolute returns over the medium to long term with a strong emphasis on capital preservation.
- Portfolio betaThe weighted average of the betas of the holdings in a portfolio — the measure of its systematic, non-diversifiable risk used in CAPM, the Treynor ratio and market-neutral strategies.