The Hindu Business Line : Arbitrage funds fare better than peers since January

Arbitrage funds have given a return of six per cent over the nine months of the current calendar year. Equity diversified funds have given negative returns of 43.49 per cent and the hybrid-debt category gave negative returns of 8.62 per cent over the same period.

Arbitrage funds have come up only recently , but are not much favoured as they are a comparatively new category, said Ms Mallika Baheti, Mutual Fund Analyst, Sharekhan Ltd.

According to analysts, these funds seem to have outperformed most other fund categories mainly due to the fact that the market conditions since January have been quite unusual.

Otherwise, these funds give returns similar to that of fixed deposits or other fixed income schemes and are preferred by risk-averse investors, an analyst added.

Currently, there are 14 funds in this category, and all of them have given positive returns since January.

The gainers

Among them are UTI SPrEAD, which has given a return of 7.08 per cent, HDFC Arbitrage Wholesale gave returns of 6.67 per cent, HDFC Arbitrage Retail gave returns of 6.48 per cent, Lotus India Arbitrage Fund gave 6.44 per cent, JM Arbitrage Fund earned 6.43 per cent, ICICI Prudential Blended Plan gave returns of 6.15 per cent and Kotak Equity Arbitrage earned 5.96 per cent, according to data provided by Value Research. (The returns are as on September 29, 2008).

One of the reasons for the good performance of arbitrage funds in the past six months is that they cashed in during the market fall in January.

They outperformed other funds because when the market fell in January, they unwound their positions in the cash market which was quoting at a higher price than the futures.

These funds usually find favour with corporations, HNI’s or savvy investors who understand the equity markets thoroughly, said an analyst.

Arbitrage funds seek to capitalise on the arbitrage opportunity arising out of the pricing mismatch of stocks in the equity and derivatives segments. They are market-neutral funds. Whichever way the market moves they can take the opportunity to earn returns, said Mr Rajiv Anand, Head-Investments, IDFC Mutual Fund.

Usually, arbitrage funds would give close to money market returns, he added.

In the case of arbitrage funds, if the market goes up by 50 per cent, these funds will give returns of around eight per cent, while if the market goes down by 50 per cent, they would still give a return of six to seven per cent, said Mr Anand.

Arbitrage funds are ideal when there is no direction in the market, or in times of uncertainty, said Mr S. Krishnakumar, Fund Manager and Head of Research, Sundaram BNP Paribas Mutual Fund.

These funds do well on a short-term basis but are not preferred when a definite trend is emerging in the market, he added.

Shrinking AUM

While these funds have managed to outperform most other categories of funds their assets under management have been continuously been shrinking since the beginning of the year.

The assets under management under the arbitrage funds have gone down by almost 30 per cent since January.

The money from arbitrage funds is flowing into schemes such as liquid schemes or fixed maturity plans, which are taking advantage of higher interest rates, said Mr Anand.