InvestorQ : How exactly do arbitrage funds operate?
Akansha Shivdasani made post

How exactly do arbitrage funds operate?

Answer
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Purvesh answered.
2 years ago


It's basically the price difference between the cash and future market. The fund buys the scrips in the cash market and sells futures of the same company till profit is generated.
Such opportunity gets created if the market is more volatile and mainly in high volume scrips. The risk is also less to invest in such funds. The Average yearly returns from such funds are around 7%


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rhea Babu answered.
2 years ago


To understand arbitrage funds, you first need to understand arbitrage as a strategy. Arbitrage is the process of identifying and locking in a price differential. Let us assume that Reliance share is quoting at Rs.900, while the Reliance Futures expiring in 1 month is available at Rs.910. This is an arbitrage opportunity. If you buy the Reliance equity share at Rs.900 and sell the Reliance Future at Rs.910, then you can lock in a profit of Rs.10 for the month. This is risk-free profit as on the last Thursday of the month when the Futures contract expires, the cash price and the futures price will be the same. Now Rs.10 on Rs.900 works out to 1.11% for one month and nearly Rs.13.2% annualised. You may believe that 13.2% returns is an attractive return on an arbitrage fund. But in reality, an arbitrage fund will face a variety of challenges through the year and hence the actual returns will never be so high.