The Hindu Business Line : FIIs betting on reverse-arbitrage?

Kolkata, Jan. 24 If you go by the SEBI figures for recent FII investments, then you may conclude that they are net sellers in the Indian equities. But it’s deceptive, say brokers and overseas fund managers.

According to them, a large chunk of money obtained through sell-offs in the cash market has of late been going to the derivatives.

Arbitrage strategy

“Foreign investors, particularly participatory notes holders, have adoted a reverse arbitrage strategy for 2 to 3 per cent additional spread available because of dip in the futures prices compared with that in the cash segment. On an annualised basis, this extra return turns out to be great.

Alpha seekers have grabbed this opportunity,” said a fund manager of an overseas investment outfit.

Another operational head of a securities firm, owned by a foreign bank, told Business Line on condition of anonymity that all the big investment outfits, who have large inventories of participatory notes, have been strong net sellers in the cash market in the last five sessions.

However, as their trade figures in the derivatives market do not indicate whether they are ‘buy’ or ‘sell’, this strategy of reverse arbitrage is not in the public domain. Since the settlement is round the corner, the new investment tactic is likely to pay off huge dividend, he felt.

Negative Cost-of-carry

But it would be wrong to assume that all FII trades are geared to this strategy. According to Mr Amitav Chakraborty of Religare, the current negative cost-of-carry might have induced some of the overseas investors to change strategies.

But, there could be foreign investors who have covered their short positions but did not go long.

According to market sources, some overseas are understood to have gone short today.

According to figures put out by the SEBI, and the provisional numbers provided by the NSE, FIIs have sold equities worth Rs 10,793 crore in the net since last Friday.