Features of Arbitrage Mutual Funds
The goal of arbitrage mutual funds is to produce returns by taking advantage of price discrepancies in the financial markets. These funds earn a very low-risk return by taking advantage of price disparities between the cash and derivative markets, typically stock and equity-related products. Key features of arbitrage mutual funds include the following:
1. Investment Strategy: Arbitrage mutual funds use an arbitrage strategy, which involves buying and selling securities in multiple markets at the same time in order to profit from price differences. They usually invest in both cash (stock) and derivatives (futures and options).
2. Lower Risk: Arbitrage methods are thought to be low-risk since they seek to profit from market inefficiencies rather than change influencing the market. Because they attempt to catch modest pricing discrepancies, the possibility of substantial losses is restricted.
3. Short-Term Investments: Arbitrage funds often have a limited investment horizon, holding holdings for a few days to a few weeks. The idea is to benefit quickly from short-term price disparities.
4. Diversification: To limit individual security risk, these funds often invest in a diverse variety of securities and derivatives.
5. Volatility: Arbitrage funds are typically less volatile than pure equities funds. However, market volatility, higher interest rates, and other factors can still have an impact on their returns.