CAT 3 AIF investment is a core due-diligence consideration for institutional investors and family offices. A recurring question is whether Category III AIFs invest in listed securities, unlisted securities, or both, and how this choice influences liquidity behaviour, valuation transparency, and portfolio governance.
For many allocators, CAT 3 AIF investment decisions hinge on the interaction between asset liquidity and redemption terms. This assessment goes beyond regulatory permission. The composition of the investment universe directly shapes liquidity dynamics, valuation practices, redemption mechanics, and governance outcomes. As Category III AIFs are increasingly used to access hedge fund-style strategies in India, clarity on listed versus unlisted exposure becomes essential for informed allocation decisions.
This article explains what Category III AIFs are permitted to invest in under Indian regulations, how listed and unlisted securities are treated within the framework, and how institutional investors should interpret this flexibility in practice.
CAT 3 AIF investment scope
Category III AIFs are designed to support sophisticated strategies that may involve active trading, derivatives, and, where appropriate, leverage. Unlike Category I and Category II AIFs, which are often associated with private market or long-duration capital, Category III AIFs typically operate closer to liquid markets.
Within the broader alternatives landscape, Category III AIFs sit where asset liquidity, execution efficiency, and risk controls intersect. This positioning is consistent with how alternative investment funds in India are increasingly used by institutions as dynamic portfolio components rather than static allocations.
The ability to invest across listed and unlisted securities must therefore be assessed through the lens of portfolio behaviour, not in isolation.
Investment in Listed Securities in cAT 3 AIFs
Category III AIFs are explicitly permitted to invest in listed securities.
This includes:
- Listed equity shares
- Exchange-traded derivatives such as futures and options
- Other listed instruments permitted under securities regulations
In practice, listed securities form the core of most Category III AIF portfolios. Strategies such as long-short equity, market-neutral, arbitrage, and quantitative trading rely on listed markets due to liquidity, pricing transparency, and execution speed.
For institutional investors and family offices, listed exposure within a Category III AIF typically supports predictable liquidity behaviour, regular mark-to-market valuation, and greater flexibility in portfolio rebalancing.
This is one reason Category III AIFs are often evaluated alongside discretionary investment structures, as explored in Whitespace Alpha’s comparison of AIF vs PMS structures in India.
Investment in Unlisted Securities
Category III AIFs are also permitted to invest in unlisted securities, subject to regulatory disclosure and governance requirements.
Unlisted investments may include:
- Unlisted equity shares
- Convertible instruments
- Other privately issued securities
While permitted, unlisted securities are not the primary focus of most Category III AIF strategies. Unlisted assets introduce different dynamics around liquidity, valuation frequency, and exit timelines, which can complicate portfolio management in strategies designed for flexibility.
For allocators, the presence of unlisted securities within a Category III AIF portfolio requires closer scrutiny, particularly where the fund offers periodic liquidity.
Regulatory Position and Disclosure Expectations
The breadth of Category III AIF investment scope is permitted under SEBI regulations, subject to disclosure and alignment with fund structure.
Oversight is provided by Securities and Exchange Board of India, which requires:
- Clear disclosure of the nature of investments in the Private Placement Memorandum
- Explicit articulation of liquidity and redemption terms
- Ongoing reporting to investors
External reference:
https://www.sebi.gov.in/index.html
This approach allows flexibility while ensuring that investors understand how asset selection affects liquidity and risk.
Allocator Pain Points Around Unlisted Exposure
For institutional investors and family offices, the question is not whether unlisted securities are allowed, but how their inclusion changes portfolio behaviour. Three concerns typically emerge during due diligence. The first is liquidity mismatch. Unlisted assets may not align well with open-ended redemption structures during periods of market stress.
The second is valuation governance. Unlisted securities rely on periodic valuation processes rather than continuous market pricing, which can affect transparency and confidence during volatile periods. The third is redemption fairness. Allocators want clarity on how redemptions are handled when illiquid positions exist and whether remaining investors are adequately protected. Addressing these concerns is central to evaluating any Category III AIF that includes unlisted exposure.
Why Most Category III AIFs Remain Listed-Focused
In practice, most Category III AIFs in India remain predominantly invested in listed securities.
This reflects strategy design rather than regulatory limitation. Hedge fund-style approaches depend on the ability to adjust exposure, manage drawdowns, and respond to changing market conditions. Listed markets support these objectives more effectively than unlisted assets.
Where unlisted securities are included, they are typically used selectively and within defined limits. This helps ensure that portfolio liquidity remains aligned with fund structure and investor expectations.
How Institutional Investors Should Evaluate the Mix
For allocators, evaluating a Category III AIF requires looking beyond regulatory permission to portfolio construction.
Key questions include:
- What proportion of the portfolio may be allocated to unlisted securities?
- How are unlisted positions valued and reviewed?
- How does unlisted exposure interact with redemption terms?
- What governance controls exist around liquidity management?
These questions are particularly relevant for family offices managing long-term or multi-generational capital, where capital optionality is a priority.
Whitespace Alpha Perspective on Investment Scope in Category III AIFs
As a SEBI-registered Category III Alternative Investment Fund, Whitespace Alpha operates within the regulatory framework governing alternative investment strategies in India.
From an institutional perspective, CAT 3 AIF investment exposure must be assessed in conjunction with valuation practices and portfolio liquidity. SEBI permits Category III AIFs to access a broad investment universe, subject to disclosure, suitability, and alignment between asset liquidity and fund structure.
For institutional investors and family offices, this reinforces an important principle. The relevance of listed or unlisted exposure lies not in the classification itself, but in how investment scope is governed, disclosed, and aligned with liquidity terms and investor expectations under the Category III AIF framework.
Disclaimer
This article is for informational and educational purposes only and does not constitute investment advice, an offer, or a solicitation to invest in any fund or strategy. Regulatory frameworks and market practices may change over time. Investors should conduct independent due diligence and consult their legal, tax, and financial advisors before making any investment decisions. Past market behaviour is not indicative of future outcomes.