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An arbitrage fund is a sub-category of Hybrid fund that seeks opportunities from differential pricing in two different segments (spot and futures or cash and derivatives) of the equity market. Such opportunities are usually tapped in volatile market conditions.

Typically, an arbitrage fund is less risky than the pure equity fund because participants are not speculating on market movements. Instead, they bet on the mispricing of a share/asset that has happened between two related markets. It is seen that the mispricing of security is far more frequent in high volatility months than in low volatility months. Lately, the markets have been extremely volatile and Union Mutual Fund wants to tap this potential to generate returns for the investors.

Hence UAF in terms of risk-return potential is moderately low and suitable for investors who are willing to park their money for short-term investment time-horizon of 1-2 years.

Table 1: NFO Details

(Source: Scheme Information Document)  

How will the scheme allocate its assets?

Under normal circumstances, the Union Arbitrage Fund's asset allocation will be as under:

Table 2a: Asset Allocation under normal circumstances

 

Under defensive circumstances, the asset allocation of the United Arbitrage Fund will be as per the below table:

Table 2b: Asset Allocation under defensive circumstances

What will be the Investment Strategy?

The Scheme will endeavour to invest in arbitrage opportunities between spot and futures prices of exchange-traded equities and the arbitrage opportunities available within the derivative segment as per the investment objective and the asset allocation pattern of the Scheme.

If suitable arbitrage opportunities are not available in the opinion of the Fund Manager, the scheme may predominantly invest in debt and money market securities. The objective of the strategy is to lock-in the arbitrage gains.

The fund manager will evaluate the difference between the price of a stock in the futures market and in the spot market. If the price of a stock in the futures market is higher than in the spot market, after adjusting for cost and taxes, the scheme may buy the stock in the spot market and sell the same stock in equal quantity in the futures market simultaneously.

The Scheme will endeavour to build similar market neutral positions that offer an arbitrage potential, for e.g. buying the basket of index constituents in the cash or futures segment and selling the index futures, etc. The Scheme would also look to avail of opportunities between one futures contract and another.

The fund manager shall use derivatives within the permissible limits actively in-addition to hedging and rebalancing the portfolio subject to the Regulations and the investment objectives and the terms of the scheme set out elsewhere in this Scheme Information Document.

The fund manager could also use active cash calls to rebalance or hedge the portfolio up to the permissible limits.

Further, the Scheme intends to use derivatives actively in-addition to the purpose of hedging and portfolio balancing or such other purpose as may be permitted under the Regulations from time to time.

Who will manage Union Arbitrage Fund?

Mr Vishal Thakker will manage the Equity portion of the scheme, while the debt portion will be managed by Mr Devesh Thacker.

Mr Vishal Thakker has to his credit a Master's in Finance Management (MFM) and over 8 years of experience in equity & derivative dealing functions.

Prior to his appointment as a Co-Fund Manager, he has been associated with Union Asset Management Company Private Limited as Dealer - Equity since March 2017. Prior to that, he was associated with Elara Capital as a Sales Trader for 7 years. He was also associated with Emkay Shares & Stock Broking as a Dealer from June for few months.

Mr Devesh Thacker has a bachelor's degree in commerce and an MBA to his credit. His overall work experience spans over 18 years in Fund Management & Banking Industry.

Before joining the Union Asset Management Company Pvt. Ltd. (AMC) as Fund Manager - Fixed Income, he was with Sahara Asset Management Co. Pvt. as Fund Manager - Fixed Income. Before that with ICICI Bank Limited, as a part of Retail Operations and Branch Banking, at Dolat Capital Markets Limited as a Dealer in Fixed Income, handling institutional client's deals and queries. At Orbis Securities (India Bulls) Limited, he worked as a Dealer in Fixed Income and at ASK Financial Services Ltd (NSE Broking Firm) as an Equity and Derivative Dealer.

At the fund house, Mr Devesh Thacker manages Union Liquid Fund, Union Dynamic Bond Fund and Union Short Term Fund.

The outlook for Union Arbitrage Fund.

Since UAF is skewed more towards equities, mainly with the objective of investing in arbitrage opportunities, the fortune of UAF will be closely linked to how astutely the fund manager cites these opportunities.

Tapping arbitrage opportunities is a challenging task, owing to the key risks associated with the arbitrage strategy:

✔ Lack of opportunity available in the market

✔ The risk of mispricing or improper valuation and the inability of derivatives to correlate perfectly with underlying assets, rates and indices.

✔ Execution Risk: The prices which are seen on the screen need not be the same at which execution will take place. This is because arbitrage opportunities are often short-lived.

Hence, the performance of the Union Arbitrage Fund depends on the construction of the portfolio using the arbitrage strategy. If there are fewer arbitrage opportunities, UAF would move into cash and money market instruments.

Thus, as an investor, before you invest in any arbitrage fund, you ought to recognise that arbitrage opportunities might not always work out. Since there's a 10% Long Term Capital Gains Tax (LTCG) on arbitrage funds for gains above Rs 1 lakh in a financial year, arbitrage funds have become unattractive for big-ticket investments.

[Read: How LTCG Tax On Equity Investments Can Derail Your Financial Plan]

So, before investing consider your investment objective, time horizon and risk appetite.

Editor’s note: If you’re unsure where to invest fresh investible surplus currently, to strike the correct risk-return trade-off we recommend adopt a ‘core and satellite approach’ to investing. Core and satellite’ investing is a time-tested strategic way to structure and/or restructure your investment portfolio.

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About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

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Details of associates

1. Money Simplified Services Private Limited;

2. PersonalFN Insurance Services India Private Limited;

3. Equitymaster Agora Research Private Limited;

4. Common Sense Living Private Limited;

5. Quantum Advisors Private Limited;

6. Quantum Asset Management Company Private Limited;

7. HelpYourNGO.com India Private Limited;

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11. HYNGO India Private Limited;

12. Rahul Goel;

13. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest

1. ‘subject company’ is a company on which a buy/sell/hold view or target price is given/changed in this Research Report;

2. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company;

3. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report;

4. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However, any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront / annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices.

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General disclosure

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Definitions of Terms Used

1. Buy recommendation:This means that the subscriber could consider buying the concerned fund keeping in mind the tenure and objective of the recommendation service.

2. Hold recommendation:This means that the subscriber could consider holding on to the fund until further update. However, additional purchase via ongoing SIP can be considered.

3. Sell recommendation: This means that the subscriber could consider selling the fund keeping in mind the objective of the recommendation service.

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