{"id":30029,"date":"2024-07-18T18:46:46","date_gmt":"2024-07-18T13:16:46","guid":{"rendered":"https:\/\/ithought.co.in\/?p=30029"},"modified":"2024-07-18T18:46:47","modified_gmt":"2024-07-18T13:16:47","slug":"why-should-we-look-at-arbitrage-funds","status":"publish","type":"post","link":"https:\/\/ithought.co.in\/why-should-we-look-at-arbitrage-funds\/","title":{"rendered":"Why Should We Look At Arbitrage Funds?"},"content":{"rendered":"\n
Arbitrage funds are on a roll this year! In just two quarters, they’ve already pulled in Rs 52,000 crores, closing in fast on last year’s total of Rs 59,000 crores (Source: AMFI Database)<\/p>\n\n\n\n
Clearly, it is becoming the investor’s favourite! But before we address why it is so, let us look at what arbitrage funds are.<\/p>\n\n\n\n
An arbitrage means a risk-free profit<\/strong>. In financial markets, where there are typically two markets- the spot and the future, security can trade at two different prices, which the arbitrageur looks to cash on. These can be a pricing mismatch between two exchanges or different pricing in the two markets due to market inefficiencies, volatility, and corporate actions.<\/p>\n\n\n\n Alpha refers to the excess returns a fund can earn over and above what the general market earns. Fund managers can create alpha in arbitrage funds primarily through two methods:<\/p>\n\n\n\n Dividend Arbitrage:<\/strong> Since futures do not earn dividends, their prices tend to be discounted by the dividend amount. If a fund manager anticipates a higher actual dividend compared to the historic dividend, they can profit from this current spread.<\/p>\n\n\n\n Market Volatility:<\/strong> During periods of market volatility, spreads in many stocks become negative due to aggressive short selling. Fund managers can proactively unwind arbitrage positions to earn extra returns.<\/p>\n\n\n\n A simple illustration of this can be seen below:<\/p>\n\n\n\nCreating Alpha in Arbitrage Funds:<\/h2>\n\n\n\n