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JM Arbitrage Advantage Fund


JM Financial Mutual Fund has launched an equity-oriented interval fund which will seek to capitalise upon the arbitrage opportunities arising as a result of mis-pricing between the cash and derivatives market. Named as JM Arbitrage Advantage Fund, it will be initially available for subscription from June 1 to June 30, 2006.

This new offering is quite similar to JM Equity and Derivative Fund, which the fund house had launched in February 2005. Both the funds have the objective of generating market neutral returns by following hedging strategies, while parking the remaining funds in fixed income securities.

The difference, however, is in the asset allocation pattern. When JM Equity & Derivative Fund was launched in February 2005, the regulations permitted mutual funds to buy/sell futures for only up to 50 per cent of the corpus. In line with this, JM Equity & Derivative's exposure to derivatives (in terms of notional value) cannot exceed 50 per cent of its assets.

But SEBI has amended the guidelines, and as a result, JM Arbitrage Advantage Fund's exposure to derivatives (in terms of notional value) can go up to 80 per cent of its assets. This can be achieved by investing 80 per cent of the assets in equity stocks and hedge it by utilizing the remaining 20 per cent towards the margin payment for off-setting futures position.

Though the new fund will have more flexibility in terms of asset allocation and a higher potential as compared to the older one, but we believe that the same could have been achieved simply by altering the asset allocation pattern of their existing JM Equity & Derivative Fund, rather coming out with a new fund.

A noteworthy point is that the fund house is committed to avail the beneficial tax treatment given to an equity-oriented fund. Hence, the exposure to equity stocks may not fall below 65 per cent, even if sufficient arbitrage opportunities are not available.

Like JM Equity & Derivative, JM Arbitrage Advantage Fund is also an interval fund. This means that while investments into the fund would be possible on all business days, redemptions will be possible intermittently during the interval periods.

The fund will not charge any entry load, though an exit load of 1 per cent will be levied upon redemption within 3 months from the date of allotment.