In a conversation with Value Research's Kumar Shankar Roy, Jay Kothari of DSP BlackRock Investment Managers talks about the newly launched DSPBR Arbitrage Fund
Arbitrage is a popular strategy among traders. But with the annual returns generally in the 5-7 per cent bracket, arbitrage funds have, over the years, become a staple for investors who want a market-neutral strategy. By launching its own fund, DSP BlackRock has now joined the list of fund houses with their own arbitrage funds. The NFO closes on January 22. Value Research's Kumar Shankar Roy had a quick chat with Jay Kothari, Vice President and Product Strategist, DSP BlackRock Investment Managers, to understand the product better. Read on.
Why are you launching DSPBR Arbitrage Fund now? Do you expect arbitrage trades to go up significantly now or in the near future?
DSPBR does not have an arbitrage offering at present and hence we are launching this strategy to fill the gap in our product offerings. We launch strategies from a longer term perspective and are not looking at the near-term market dynamics.
This fund is suitable for what kind of investors? How does hedging help in minimising equity market risk?
Arbitrage funds are suitable for investors who're looking at returns similar to liquid/money market funds. Being a market-neutral strategy (we will not be taking directional calls), there is minimal equity market exposure risk. The idea is to buy a particular stock in the cash market and then sell it in the futures market, and take the benefit of the spread (arbitrage), which exists at various points in time. But the spread keeps changing based on the demand/supply dynamics.
What is the taxation with respect to arbitrage funds?
At present, arbitrage falls under equity taxation (0 per cent tax for holding over one year).
What is the fund's investment strategy?
The arbitrage strategy is a market-neutral strategy. It aims to generate returns from the price differential (cost of carry) by taking a long position in equity and offsetting short position in equity futures of exchange-traded equities.
During the expiry of the futures contract, the positions are either reversed or rolled over based on the favourable spread available with the next month's futures.
What is the unique selling point of this fund vis a vis others in the arbitrage category?
While arbitrage funds are perceived as a "commoditised" product, we believe we can optimise returns from the expertise we have.
As far as performance goes, what kind of timeframe should investors give to this arbitrage fund? Why have you selected a liquid fund benchmark for the fund?
With return expectations being similar to liquid funds and taxation being that of equity funds, one year should be the minimum time horizon for an investor to justify the investment into an arbitrage fund.
When adequate arbitrage opportunities will be unavailable in the derivative and equity markets, what will the fund do?
We will always stick to the mandate and believe the opportunities will be available at all points, but the spreads may not remain constant.