The Hindu Business Line : Arbitrage funds outperform benchmarks

Arbitrage funds rarely had it so good — all funds in this category have in the past one year or so outperformed their benchmarks by a convincing margin.

The funds, which seek to capitalise on price differences between cash and derivatives, have managed to leverage on recent bullish trends in the market. These trends are said to have provided the fund managers concerned with sufficient arbitrage prospects, marked by decent spreads.

Fund houses, such as UTI MF (which manages the Rs 300 crore-plus SPrEAD Fund), contend that the equity scenario may well remain robust over the long-term, leading to extended spreads.

The funds in question, which have a mix of equity and equity-related securities and debt instruments in their portfolios, have been actively chasing these opportunities, a strategy they clearly wish to pursue in the days ahead, sources pointed out. Their performance will, in future, generally depend on two factors. Firstly, low volatility returns, courtesy arbitrage opportunities, and secondly, low credit risk short-term debt instruments.

Fund houses also suggest there is a stronger case for arbitrage products than what is currently evident. In other words, there is greater scope for introducing these products in the coming days. It is, however, felt that the investor community should take to the concept more seriously.

It will also be possible to launch product variants, sources add, while referring to products such as Prudential ICICI Blended Plan. The latter comes in two plans - A and B.

As Pru ICICI MF points out, the first plan has a blend of equity and equity arbitrage (at least 51 per cent) and low volatility returns from a minimum debt exposure of 25 per cent for a short horizon. The other plan tries to deliver low volatility returns from debt (at least 51 per cent) along with equity arbitrage (up to a maximum 49 per cent).

About half-a-dozen funds make up the category at the moment. While there has been no major variation in performance in recent times, the best one-year performer, Pru ICICI Blended Plan A, has notched 8.2 per cent compared with 5.5 per cent fetched by Crisil Short Term Bond Fund Index, its benchmark.

These funds, MF circles believe, generally have the scope of outdoing the average short-term options, including liquid funds, because of their strategy. UTI MF's SPrEAD Fund, for instance, has done this vis-à-vis the relevant liquid fund index. The returns since inception (as on November 30) stand at 5.85 per cent compared with 5.79 per cent recorded by the index.

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