Published May 26, 2026 4 Min Read

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Introduction

Liquid alternatives are investment funds that use advanced strategies like long-short investing, arbitrage, and market-neutral trading while still offering easier access than traditional hedge funds. These funds aim to reduce market risk or generate returns in different market conditions.

  • Liquid alternatives usually offer daily liquidity, unlike many hedge funds that may have lock-in periods.
  • Common strategies include long-short funds, arbitrage, managed futures, and market-neutral investing.
  • These funds are market-linked investments and follow SEBI regulations and risk disclosure rules.
  • The SEBI riskometer classifies fund risk levels as Low, Moderate, High, or Very High depending on the strategy used.
  • Investors on the Bajaj Broking website can choose from 4,000+ mutual fund schemes and start SIP investments from Rs. 100 per month.
  • KYC is mandatory before investing, as required under SEBI regulations.

You can start your mutual fund investment journey on the Bajaj Broking website — complete KYC online, compare different fund categories, and begin investing through SIP or lumpsum modes.

What are liquid alternatives?

Liquid alternatives are investment funds that use alternative investments and hedge fund strategies inside a regulated mutual fund structure. These strategies may include long-short investing, arbitrage, futures trading, or market-neutral investing.

The word “liquid” means you can usually buy or redeem units daily at the applicable NAV. NAV is the price per unit of a mutual fund scheme, calculated daily after market close.

Many investors use liquid alts to diversify beyond regular stock and bond investments. These funds may behave differently from traditional equity funds during market volatility.

Key features of liquid alternatives

FeatureWhat it meansWhy it matters
Daily liquidityUnits can usually be redeemed daily at NAVEasier access to money compared to many hedge funds
Alternative strategiesUses methods beyond simple buy-and-hold investingMay reduce dependence on market direction
SEBI regulationOperates under mutual fund regulations in IndiaAdds transparency and disclosure requirements
DiversificationExposure to different asset classes or strategiesMay lower portfolio concentration risk

What are long short funds?

Long short funds are a common type of liquid alternative fund. These funds buy stocks expected to rise and sell stocks expected to fall.

The goal is to generate returns while reducing overall market exposure. Because of derivatives and short-selling strategies, these funds may carry Moderate to Very High risk on the SEBI riskometer.

How do liquid alternatives work?


Liquid alternatives work by combining mutual fund accessibility with advanced trading strategies. Professional fund managers at the respective AMC manage these funds based on the scheme objective.

When you invest, units are allotted based on the applicable NAV. The fund manager then uses different investment tools such as derivatives, futures, options, or short positions to manage the portfolio.

Common portfolio methods

  • Buying undervalued assets and selling overvalued assets
  • Hedging market exposure using derivatives
  • Trading based on price differences between markets
  • Using commodities or currencies for diversification
  • Managing exposure dynamically during volatile markets

Risk and regulation

Liquid alternatives are still market-linked investments. Returns are not guaranteed and may vary across market cycles.

SEBI requires mutual fund schemes to display a colour-coded riskometer showing risk levels such as Low, Moderate, High, or Very High. AMFI promotes ethical and transparent practices across the mutual fund industry.

Which types of liquid alternatives can you choose?


Different types of liquid alternatives focus on different investment strategies and risk levels. Some aim for stable returns, while others try to benefit from market volatility or price movements.

Type of liquid alternativeMain strategyRisk levelSuitable for
Long short fundsBuys and shorts stocksHigh to Very HighInvestors seeking lower market correlation
Market-neutral fundsBalances long and short positionsModerate to HighInvestors looking for lower volatility
Arbitrage fundsUses price differences between marketsLow to ModerateConservative investors seeking equity taxation benefits
Managed futures fundsTrades futures contractsHighInvestors comfortable with volatility
Multi-asset alternative fundsInvests across asset classesModerate to HighInvestors wanting diversification

Before investing, check the scheme objective, asset allocation, and riskometer carefully. Different AMCs may follow different investment approaches even within the same category.

Which hedge fund strategies do liquid alts use?


Liquid alts often use strategies that were earlier available mainly through hedge funds. These strategies try to manage downside risk or generate returns in different market conditions.

Long-short strategy

A fund buys securities expected to rise and shorts securities expected to fall. This may reduce dependence on overall market direction.

Market-neutral strategy

The fund balances long and short positions to reduce exposure to broad market movements. The focus is usually on generating returns from stock selection differences.

Arbitrage strategy

The fund tries to benefit from price differences between cash and futures markets. Arbitrage funds are commonly used by conservative investors because they generally carry lower volatility.

Managed futures strategy

The fund trades futures contracts linked to commodities, indices, interest rates, or currencies. These strategies may react strongly to market trends and volatility.

Multi-strategy approach

Some liquid alternatives combine multiple hedge fund strategies inside one portfolio. This may improve diversification but can also make the strategy more complex to understand.

Conclusion

Liquid alternatives give you access to alternative investments through a regulated mutual fund structure. They combine hedge fund strategies with easier liquidity and wider investor access.

These funds may help diversify your portfolio and reduce dependence on traditional equity or debt performance. However, they can also carry higher complexity, derivative exposure, and market risk.

Before investing, review the fund strategy, riskometer level, expense ratio, and investment objective carefully. On the Bajaj Broking website, you can compare 4,000+ mutual fund schemes and start investing through SIP or lumpsum modes after completing KYC.

Frequently asked questions

What are liquid alternatives?

Liquid alternatives are mutual funds that use alternative investments and hedge fund strategies like long-short investing, arbitrage, or futures trading while still offering daily liquidity. These funds are regulated by SEBI and provide easier access than traditional hedge funds. On the Bajaj Broking website, you can compare 4,000+ mutual fund schemes and start SIP investments from Rs. 100 per month after completing KYC.

What is the difference between liquid alternatives and hedge funds?

Liquid alternatives are usually offered through regulated mutual fund structures with daily liquidity and lower investment barriers. Hedge funds often have higher minimum investment requirements, limited redemption windows, and fewer retail investor protections. Liquid alternatives also follow SEBI disclosure norms and display the SEBI-mandated riskometer, while hedge funds may operate under different regulatory structures depending on the jurisdiction.

What are the pros and cons of liquid alternatives?

Liquid alternatives may help you diversify your portfolio and reduce dependence on stock market direction. They can use strategies like arbitrage or long-short investing to manage volatility. However, these funds may also carry higher complexity, derivative exposure, and Moderate to Very High risk levels on the SEBI riskometer. On the Bajaj Broking website, you can review scheme details, portfolio information, and risk levels before investing.

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