Hedge Funds interview preparation

Questions

100

Traced to a firm

39

Firms

16

Updated

September 2026

Asked at

All firmsMan Group10Balyasny Asset Management7Bridgewater Associates3DED.E. Shaw3Apollo Global Management2KKR2Oaktree Capital Management2Point722SCSquarepoint Capital2ACAQR Capital Management1BGBaupost Group1Coatue Management1HPS Investment Partners1Northern Trust1Viking Global Investors1Wolverine Trading1

Topic

All topicsStrategy taxonomy8Stock pitch10Short selling6Portfolio construction8Risk and drawdown8Performance and alpha7Event-driven and merger arb8Distressed and credit5Fund structure and economics7Financing, NAV and operations6Compliance and research process5Quant and systematic6India and Category III AIFs5Career and fit11

Level

AnyCoreIntermediateHard

Type

AnyTechnicalMarket viewBrainteaserCaseFit

1. 085What is a Category III AIF, and why is it the Indian hedge fund vehicle?India and Category III AIFsIntermediatetechnicalIndian hedge fundsCategory III AIFs

   Say this

   It is the SEBI alternative investment fund category for funds that use complex trading strategies, leverage and derivatives. Categories I and II cannot leverage except for operating needs, so Category III is the only domestic wrapper in which a long-short or arbitrage strategy can actually be run.

   Then walk it

   1. The structure: a privately pooled vehicle, usually a trust, registered with SEBI under the AIF Regulations of 2012. Minimum investor commitment of 1 crore rupees, minimum corpus of 20 crore, and a maximum of 1,000 investors per scheme.
   2. The manager must commit its own capital alongside investors: the continuing interest requirement, the lower of 5 percent of the corpus or 10 crore rupees for Category III. That is skin in the game written into the regulation.
   3. What makes it the hedge fund category is permitted leverage and unrestricted use of listed derivatives, subject to disclosure of the leverage limit in the fund documents and periodic reporting to SEBI. Gross exposure is capped at two times NAV for most schemes.
   4. Category III splits into close-ended and open-ended schemes, and most long-short funds are open-ended with monthly or quarterly liquidity, so the terms look more like a hedge fund than a private equity fund.
   5. Why not the alternatives: a mutual fund under SEBI's mutual fund rules cannot short physical stock and faces tight derivative limits; a PMS is a managed account, not a pooled vehicle, so it cannot run a fund-level short book efficiently. Category III fills exactly that gap.
   6. The honest limitation for a candidate to name: the 1 crore minimum restricts the investor base to high net worth individuals and family offices, so the domestic capital pool is far smaller than the US institutional base. Many Indian strategies therefore run offshore feeder structures in parallel to access foreign capital.

   Where candidates lose it

   Confusing the three AIF categories. Category I is social or infrastructure venture capital with incentives, Category II is private equity and debt funds with no leverage, Category III is the trading category. Get that wrong and an Indian interviewer stops listening. Also know the 1 crore minimum and the manager's continuing interest requirement.

   Expect next

   • How is a Category III AIF different from a PMS?
   • What are the leverage limits?
   • Why would a manager run an offshore feeder alongside it?
2. 086How are Category III AIF returns taxed in India, and why does that shape the strategy?India and Category III AIFsIntermediatetechnicalIndian hedge fundsCategory III AIFs

   Say this

   Category III AIFs do not get the pass-through treatment that Categories I and II enjoy, so tax is generally paid at the fund level rather than by the investor. Because business income for a trust can be taxed at the maximum marginal rate, the tax drag is material and it pushes managers towards holding periods and instruments that attract capital gains treatment rather than business income.

   Then walk it

   1. The structural point first: Categories I and II have explicit tax pass-through, so income other than business income is taxed in the investor's hands. Category III was left out, so the fund itself is generally the taxable entity and the character of its income determines the rate.
   2. That makes income characterisation the central question. Gains treated as capital gains attract the capital gains rates; gains treated as business income, which is where frequent trading and derivative activity often land, can be taxed at the maximum marginal rate applicable to the trust.
   3. Derivatives complicate it further, because exchange-traded derivative income is typically business income rather than capital gains. A strategy that expresses everything through futures and options can therefore carry a heavier tax profile than the same view held in cash equity.
   4. Then the transaction taxes layered on top: securities transaction tax on equity and derivative trades, stamp duty, and exchange charges. STT is small per trade and becomes significant for a high-turnover book, so it is a direct constraint on turnover-heavy strategies in India.
   5. The practical consequence, which is the part that answers the question: after-tax return dominates strategy design. Managers lengthen holding periods where they can, prefer cash-market expressions when the tax treatment is better, and often run an offshore vehicle for foreign investors where the treatment differs.
   6. The caveat to say plainly: this is an area where the treatment turns on facts, on how the fund is set up and on rules that have been amended repeatedly, so any specific number I give you should be checked against the current Finance Act. The framework point stands: Category III is not a pass-through, and that is the thing that drives behaviour.

   Where candidates lose it

   Stating confident tax rates. The regime has changed several times and the characterisation of income depends on the facts, so precise rates quoted with certainty read as bluffing. What you must get right is the structural asymmetry: Categories I and II are pass-through, Category III generally is not, and that drives turnover and instrument choice.

   Expect next

   • Why does STT matter more for some strategies than others?
   • How does an offshore feeder change the tax outcome?
   • Would that push you towards cash or derivatives?

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.