A word of warning on arbitrage schemes

Mumbai: Three mutual funds — Edelweiss, Kotak and IDFC — have warned investors of either near-term losses or poor returns in arbitrage schemes, with spreads turning negative and causing money-making opportunities to shrink.These funds manage assets worth about 55,000 crore.“Due to the pressure from arbitrage players on short roll-overs, spreads across stocks dipped into negative territory from over 20 basis points. Large inflows into arbitrage funds in the last two months and lower interest rates have also contributed to the dip in overall arbitrage spreads,” Edelweiss MF said in a note to investors.Arbitrage schemes make money when stock futures trade above the cash-market price. These funds buy shares and sell stock futures at the same time to benefit from price conversion. Last week, futures contracts of several stocks went into a discount to the shares because of dividends and short positions. Since these schemes cannot sell shares and buy futures simultaneously, opportunities have shrunk, resulting in returns taking a hit.“These funds are witnessing some volatility due to the swing from positive to reverse arbitrage. An investor must take a 3-6 month view to invest in arbitrage funds and benefit from volatility,” said Nilesh Shah, MD, Kotak Mutual Fund.Over the past one week, liquid funds have delivered only an annualised 2.6 per cent, due to which return seekers are looking for alternative avenues. Earlier, the Franklin Templeton decision to wind up six debt schemes caused many savers to move from credit risk funds to arbitrage funds. “Corporate money is coming into arbitrage funds with even a 15-day to two-month time frame. They could see negative returns and be disappointed and hence this warning from fund houses,” said the CEO at a domestic fund house.“In the current environment, one should not look at 15-day or one-month returns in an arbitrage fund as the market is extremely volatile and due to marked-to-market accounting, one may not get a clear visibility about future returns. Investors should come with a time horizon of at least 3-6 months,” said Radhika Gupta, CEO, Edelweiss Mutual Fund.As per data from Value Research, arbitrage funds on an average have returned 5.17 per cent over the past one year.

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