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?
3. 087Why is long-short so much harder to run in India than in the US?India and Category III AIFsHardtechnicalIndian hedge fundsCategory III AIFs

   Say this

   Because the short side barely exists in the cash market. There is no developed stock lending market, so almost all shorting happens through single stock futures, which restricts you to the names in the derivatives segment and imposes roll costs and position limits. The short book is therefore structurally narrower than the long book.

   Then walk it

   1. Start with the mechanics. India has no meaningful securities lending and borrowing depth. The SLB platform exists but volumes are thin, so a practical short is a single stock future, and only a limited set of names, roughly 200 or so, are in the futures segment at any time.
   2. That is the binding constraint. You can be long any of the two thousand tradable names and short only the large and liquid ones, so a classic pair trade in mid caps is frequently not expressible.
   3. Then the cost. Futures roll every month, and the basis moves with borrow demand and positioning, so the cost of a short is not a quoted borrow fee but a roll cost that can widen exactly when you most want the position. There is no term certainty.
   4. Then the position limits and margins. Exchange-level and client-level open interest limits, mark-to-market margin on the futures leg, and periodic regulatory tightening of derivative rules mean the short book has an operational overhead the long book does not.
   5. Then market structure. Retail and derivatives volumes dominate, index options turnover is enormous relative to cash equity, and domestic institutional flows into equity funds are steady and large, so the market has a persistent upward bias that penalises short books.
   6. So what actually works in India looks different: long-biased funds with an index hedge, cash-futures arbitrage, merger and event situations, and long-short expressed within the futures universe. Honest framing: India is a great market for long-biased alpha and a hard market for a market-neutral book, and most successful domestic Category III strategies reflect that rather than fight it.

   Where candidates lose it

   Answering with generic emerging market caveats about liquidity and governance. The specific, correct answer is the absence of a cash stock lending market and the resulting dependence on single stock futures, with all the universe, roll and limit consequences that follow. Naming the futures universe constraint is what shows you know the market rather than the idea of it.

   Expect next

   • How would you hedge a mid-cap long that has no future?
   • What is cash-futures arbitrage and why is it popular in India?
   • What would change if SLB volumes grew?
4. 088What does the Indian hedge fund landscape actually look like?India and Category III AIFsCoretechnicalIndian hedge fundsIndian asset management

   Say this

   Small but growing fast, and dominated by long-biased and arbitrage strategies rather than market neutral. The domestic vehicle is the Category III AIF, the capital comes largely from high net worth individuals and family offices, and separately there is a large offshore community of foreign funds trading India through the FPI route.

   Then walk it

   1. Two distinct populations, and it helps to separate them. Domestic managers running Category III AIFs and PMS mandates for Indian HNI money, and offshore funds accessing India as foreign portfolio investors or through participatory notes and swaps.
   2. The domestic side has grown quickly off a small base, with AIF commitments across all categories running into several lakh crore rupees, though Category III is a minority of that and far smaller than the mutual fund industry, which manages tens of lakh crore.
   3. Strategy mix reflects the market's constraints: long-biased equity with index hedging, cash-futures and index arbitrage, event-driven and merger situations, some quant and factor products, and a growing set of credit and structured strategies in Category II.
   4. The talent pool comes from domestic brokerages, mutual fund and insurance research desks, the global banks' and asset managers' India research centres, and increasingly from analysts returning from Singapore, Hong Kong, London and New York.
   5. The structural tailwinds are real: domestic financialisation, systematic investment plan flows creating a deep and steady buyer base, rising HNI wealth, and a deepening derivatives market. The constraints are also real: the short side, the 1 crore minimum, the tax treatment, and a retail-dominated flow environment.
   6. Say the honest strategic conclusion, because that is what an interviewer wants. India rewards fundamental long-biased stock picking in mid and small caps where coverage is thin, and it punishes strategies that need cheap and reliable shorting. Anyone claiming to run a US-style market-neutral book in India should be asked how they source their shorts.

   Where candidates lose it

   Answering as though the Indian market were a smaller copy of the US one. The structure is genuinely different: retail and derivative dominated, steady domestic inflows, weak stock lending. Also be able to name the two populations, domestic AIFs and offshore FPIs, because candidates often only know one of them exists.

   Expect next

   • Where is the best alpha opportunity in India right now?
   • What is the FPI route and how does an offshore fund use it?
   • Why has the mutual fund industry grown faster than AIFs?
5. 089What SEBI rules would you need to know before running a long-short book in India?India and Category III AIFsHardtechnicalIndian hedge fundsCategory III AIFs

   Say this

   Four bodies of rules: the AIF Regulations that govern the fund itself, the derivative and position limit framework that governs how you short, the insider trading regulations, and the disclosure thresholds on large positions. Plus the operational rules on valuation, reporting and custody.

   Then walk it

   1. The AIF Regulations of 2012 first: registration, the Category III leverage limit expressed as gross exposure not exceeding twice NAV, the 1 crore investor minimum, the manager's continuing interest, periodic reporting to SEBI, and the requirement to disclose the leverage and risk framework in the placement memorandum.
   2. Then the derivatives framework, because that is how you short. Which names are in the futures and options segment, market-wide and client-level position limits, margining including SPAN and exposure margin, and the periodic tightening of index option rules. Your short capacity is defined by these, not by your conviction.
   3. Then insider trading, which is SEBI's Prohibition of Insider Trading Regulations of 2015. Unpublished price sensitive information is the Indian formulation, and the regime requires a code of conduct, a structured digital database recording who received what information, trading windows and pre-clearance. The structured digital database requirement is a genuinely distinctive Indian feature worth naming.
   4. Then disclosure. Takeover Regulations require disclosure at 5 percent and on changes of 2 percent thereafter, which matters for a concentrated book. Short positions must also be disclosed to the exchanges under the framework that prohibits naked short selling; institutional investors cannot square off intraday.
   5. Then the operational layer: valuation policy and independent valuation of unlisted holdings, custodian requirements, benchmarking of AIF performance, and the compliance test report the manager files.
   6. The honest caveat: this is an actively changing rulebook, with amendments most years on derivative limits, disclosure and AIF structuring. So I would give you the framework and say that the specific thresholds need checking against the current circulars rather than quoting them from memory as though they were fixed.

   Where candidates lose it

   Bluffing specific numbers. Indian regulation changes frequently and an interviewer who works under it will know when a threshold is stale. Give the four buckets confidently, name the distinctive items such as the structured digital database and the no-naked-shorting rule, and flag that the exact limits need verification.

   Expect next

   • What is a structured digital database and who has to keep one?
   • Can an institutional investor square off a short intraday in India?
   • How does the 5 percent disclosure threshold affect a concentrated book?

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.