Investors can turn towards arbitrage funds for some solace, at a time when a pall of gloom has descended across asset classes. Asset classes including real estate, gold and equities have been taking a collective beating for some time.
Arbitrage funds, in the hybrid category, seem relatively untouched by the market meltdown. It is the only fund category amongst equity-linked funds that has offered positive returns, as against negative returns by most other equity-oriented schemes, over the one-year period ended October 27, 2008. In fact, arbitrage funds thrive on market volatility.
According to Value Research, arbitrage funds have recorded a positive return of 7.90% over the one-year period ended October 27, 2008. Compared to this, debt-oriented funds have given a negative return of 10.90%. Equity-oriented funds have also offered a negative return of 39.77% during the period.
Arbitrage funds basically track inter-market mispricings and trade in them very quickly to get near risk-free returns. They would typically track price differentials between two exchanges; buy in one and sell in the other.
Arbitrage fund managers also look at mispricings in spot and futures markets to gain from the small window of opportunities. Volatile markets offer more such windows as compared to range-bound stable markets, said a fund manager.
The product structuring of arbitrage funds?a mix of equity, debt and other asset classes?has also helped them perform better than other hybrid schemes. Among arbitrage funds, UTI SPrEAD has been the best performer in the last one year. It gave a return of 9.12%. SBI Arbitrage Opportunities, Lotus India Arbitrage and JM Arbitrage Advantage were other good performers during the one-year period. Commenting on the positive return of arbitrage funds, a fund manager from a domestic fund house said that such funds invest up to 65% in equities and 35% in debts or any other stable assets. Interestingly, the US financial turmoil has hit the domestic equity market. This has led to a negative return for all equity-linked schemes. The return on the Sensex-linked funds has dipped by 55.78%, while that on Nifty-linked funds has come down 55.73%.
Similarly, the return on sectoral funds?including pharma, FMCG, banking and auto?have also been negative during the one-year period ended October 27, 2008.