Fund houses suspending fresh flows to arbitrage schemes on thinning spreads

Arbitrage spreads are normally available in the 35-40 bps range, but have currently narrowed to 15-20 bps with many securities trading at discount

Arbitrage funds, which buy in cash markets and sell in futures at higher prices, are feeling the impact of the ongoing market volatility with the futures now trading at a discount to spot market prices.  

This has led to spreads for such funds shrinking, with some fund houses suspending fresh flows into these schemes to insulate new investors from the dislocation in the market.

Recently, both Tata MF and ICICI Prudential MF suspended fresh flows to their arbitrage schemes. ICICI MF has stopped accepting fresh investments till March 31.

“Future market opportunities in the arbitrage space have reduced drastically. To quantify the fall in spread, under normal conditions, arbitrage spreads are available in the range of 35-40 basis points, but have currently narrowed to 15-20 bps with many securities trading at discount,” ICICI MF said in a note.

The fund house has said that investors who have long-term investment horizon may continue to remain invested as this is a “special situation”.

“Fresh investors coming into the arbitrage schemes will have to see some losses, so it is a prudent move to suspend flows into these schemes,” said a fund manager.

Industry participants say that arbitrage schemes can still be among the safer products available in the market.

“Technically, one cannot make losses in arbitrage schemes, except only to the extent of the fund’s expense ratios in the worst-case scenario. This is because all the positions are balanced-out in such fund.  So, investors can keep their investments in such schemes as the dislocation in market can reverse going ahead,” said Jimmy Patel, managing director and chief executive officer of Quantum MF.

Arbitrage schemes have seen sizeable investor flows in the current financial year as investors sought pockets of safety with credit risks hitting debt schemes. From beginning f current financial year, investor assets have risen 71 per cent -- from Rs 50,839 crore to over Rs 87,000 crore.  

In year-to-date, the arbitrage schemes have given returns of 1.3 per cent. Over one-year and three-year period, the schemes have given average returns of 5.9 per cent and 5.8 per cent, respectively.