Why Arbitrage Funds Are Better During Volatile Markets

04 Mar, 20243 mins read
Why Arbitrage Funds Are Better During Volatile Markets


Arbitrage is like finding good deals in the financial world to make money with low risk. It involves buying something at a lower price in one place and selling it at a higher price in another and making a profit. This practice takes advantage of temporary pricing imbalances, helping to align prices in different markets.

  • Challenges for Individual Investors: Individuals face challenges in exploiting arbitrage opportunities due to technological and financial differences compared to big investors. They may lack real-time market information and face higher transaction costs. Regulatory restrictions and minimum investment requirements can also limit access, requiring a good understanding of financial markets for successful participation.

Understanding Arbitrage Mutual Funds

  • Definition and Purpose: Arbitrage funds aim to make money by exploiting price differences in different markets. They focus on generating profits from temporary mismatches in stock, commodity, or currency prices. These funds provide stable returns with lower risk, making them attractive for those who prefer a safer approach.
  • Overview of Fund Managers' Strategies: Fund managers use analytical tools to identify differences in asset values and execute buying and selling transactions. This helps them benefit from market inefficiencies and generate returns. So basically arbitrage funds focus on short-term opportunities, providing a more consistent income stream with lower exposure to market volatility.
  • Comparison with Traditional Strategies: Arbitrage differs from traditional strategies by aiming for quick returns through short-term market inefficiencies. It demands active monitoring and quick execution, offering a more stable income with lower exposure to market ups and downs.

Features of Arbitrage Mutual Funds

  • Equity-Oriented Nature: These funds primarily focus on stocks or equity securities, which can bring higher potential for profit but also more market volatility.
  • Hedged Exposure and Risk Mitigation: Hedged exposure helps balance potential losses, safeguarding investments against adverse market movements and minimising risks.
  • Performance in Volatile Markets: Arbitrage funds show resilience in volatile markets, offering relative stability and potential consistent returns.
  • Tax Implications and Advantages: Arbitrage funds may benefit from favourable tax treatment due to their hybrid characteristics, providing potential tax advantages for investors. However, individual circumstances should be considered.

Mechanisms of Arbitrage in Mutual Funds

  1. Price Differences between Exchanges: Traders exploit price differences between exchanges by buying at a lower price on one exchange and selling at a higher price on another.
  2. Price Differences between Cash and Futures Markets: Arbitrage involves buying an asset in the cash market at a lower price and selling its futures contract at a higher price, or vice versa.
  • Explanation of Fund Managers' Strategies:

Fund managers use arbitrage strategies to buy low and sell high, aiming for quick profits before prices equalise. Selecting the best arbitrage funds involves considering various factors such as Choosing the best arbitrage funds requires a careful evaluation of key factors and the underlying strategy of each fund. One crucial consideration is the historical performance of the fund, examining its track record in efficiently capturing arbitrage opportunities and delivering consistent returns. Investors should analyse how well the fund has navigated different market conditions and whether it aligns with their risk tolerance and investment goals. While chosing best arbitrage funds one must check the expense ratio is, as lower fees contribute to higher overall returns for investors. A fund with a transparent and well-executed strategy, evident from its historical performance, can instil confidence in investors seeking stability and reliable returns.

Another vital aspect is understanding the fund's risk management strategy. The best arbitrage funds beat market uncertainties successfully. This includes diversification across various assets and effective hedging strategies to protect against potential losses. A clear and well-communicated risk management approach provides investors with insights into how the fund handles different market scenarios, contributing to overall confidence in the fund's ability to deliver stable returns. By thoroughly evaluating both the historical performance and risk management strategy of arbitrage funds, investors can make informed decisions that align with their financial objectives and risk preferences.

Benefits of Arbitrage Mutual Funds

  • Lower Risk Profile: Arbitrage mutual funds offer lower risk compared to some investments, focusing on short-term price differences for a more stable environment.
  • Taxation Advantages and Implications: These funds may benefit from favourable tax treatment due to their hybrid nature, potentially subjecting capital gains to lower tax rates.
  • Potential Returns and Performance Indicators: Arbitrage mutual funds provide potential returns by capitalising on short-term market  opportunities, with performance indicators like historical returns guiding investment decisions.


  1. What is an equity arbitrage fund?

An equity arbitrage fund profits from short-term price differences between stocks, derivatives, or related securities, offering stability and lower volatility.

  1. How do arbitrage funds work?

Arbitrage funds make money by exploiting short-term price differences in different markets, aiming for quick returns with lower risk.

  1. Are arbitrage funds safe?

While generally safer than some investments, the safety of arbitrage funds depends on market conditions and the fund manager's expertise. No investment is entirely risk-free.

  1. Can arbitrage funds give negative returns?

   Yes, arbitrage funds can yield negative returns due to market uncertainties or unsuccessful strategies, though less frequently than more volatile options. Investors should assess their risk tolerance and scrutinise fund performance before investing.

disclaimer: the information provided in this blog is for general informational purposes only. it should not be considered as personalised investment advice. each investor should do their due diligence before making any decision that may impact their financial situation and should have an investment strategy that reflects their risk profile and goals. the examples provided are for illustrative purposes. past performance does not guarantee future results. data shared from third parties is obtained from what are considered reliable sources; however, it cannot be guaranteed. any articles, daily news, analysis, and/or other information contained in the blog should not be relied upon for investment purposes. the content provided is neither an offer to sell nor purchase any security. opinions, news, research, analysis, prices, or other information contained on our blog services, or emailed to you, are provided as general market commentary. stack does not warrant that the information is accurate, reliable or complete. any third-party information provided does not reflect the views of stack. stack shall not be liable for any losses arising directly or indirectly from misuse of information. each decision as to whether a self-directed investment is appropriate or proper is an independent decision by the reader. all investing is subject to risk, including the possible loss of the money invested.

it’s time to grow your wealth

3 users1+ Lac investors are growing their wealth with Stack.
stack mb