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Arbitrage Funds Change Tack

JP Morgan Alpha Fund has recently revised its objective and asset allocation

Assets of Arbitrage funds have increased at a fast pace in the recent period. The pace of the collections has been of such intensity that they have more than doubled in less than five months. From Rs 2,363 crore in February 2009, they have increased to Rs 6,027 crore in July 2009.

This has happened despite the fact that some of these funds have suspended new sales, while others have revised objectives and asset allocations.

The leader in effecting changes is JPMorgan Alpha Fund, an arbitrage scheme that has recently revised its objective and asset allocation. Others are expected to follow more or less in its footprints.

The limit to investment in fixed income securities has been extended up to 100 per cent from 35 per cent. To reach its objective of achieving total returns in excess of the return on short term instruments, the fund will, apart from buying and selling of equity and equity-liked securities, including derivatives, also invest in debt and money market instruments.

An additional risk factor has been added under the scheme, and that is, in the absence of adequate arbitrage investment opportunities, 100 per cent of investments can be made in fixed income instruments.

Moreover, the maximum total recurring expenses have been revised to 2.25 per cent per annum.

All investors under this scheme have been given the option to redeem their investments without paying any exit load between August 20 to September 19, 2009.Arbitrage schemes generate returns by cashing in on asset mispricing in the cash and derivative markets.

These funds, long understood to be a safe asset class with a superior tax advantage, carry certain risk too -- if they do not find enough opportunities, they will invest in debt to achieve their objective, but in the process lose their tax advantage.

Others in the category, Kotak Equity Arbitrage, ICICI Prudential Blended Plan A and ICICI Prudential Equity and Derivative Income Optimiser Plan (both retail and institutional plans) – all arbitrage funds – have suspended new sales, signalling a change in investments direction. However, existing investors who had chosen the Systematic Investmnt Plan (SIP) or Systematic Transfer Plan (STP) to invest, can continue their plans. But from July 1, 2009, fresh purchases, additional purchases and switch-ins are not permitted.