Category III AIFs: Understanding Quant, Arbitrage, and Volatility Management Strategies.

12 November 2025

Imagine a fund that doesn’t just follow the market—it outsmarts it. 

That’s what Category III, India’s hedge fund-style AIFs offer! 

From long-only bets to quant-driven strategies and volatility plays, these AIF funds are helping Indian investors move beyond traditional avenues and capture opportunities others might miss. 

Here’s the inside scoop.

What Makes Category III AIFs Stand Out

Category III AIFs are the most flexible and dynamic within India’s alternative investment framework. Unlike Category I and II AIFs, which are closed-ended with a minimum three-year lock-in, Category III AIFs can be open-ended or closed-ended, offering greater liquidity. 

They can also leverage up to twice their Net Asset Value (NAV), allowing managers to amplify returns through derivatives and complex trading strategies.

By investing in listed and unlisted derivatives, these funds employ tactics such as arbitrage, long-short or short-only, setting them apart from other categories that focus mainly on venture capital or private equity. 

Growth Trajectory: The Numbers Tell the Story

The Indian AIF industry has expanded dramatically. From just 42 SEBI-registered AIFs in 2013, the number surged to 1,150 by September 2025. Total commitments crossed ₹14.18 lakh crore as of June 2025, marking a growth of over 20% from June 2024.

Investor interest in Category III AIFs has been phenomenal. Commitments raised jumped from ₹50,030 crore in FY21 to a record ₹2,29,927 crore in FY25, a CAGR of over 45%. The sharp increase in FY24 and FY25 highlights a structural shift, driven by HNIs and family offices seeking diversification beyond traditional portfolios.

Source:SEBI website data

This consistent rise demonstrates that Category III AIFs—once niche, are now mainstream tools for investors targeting alpha.

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