Ask me anything about Arbitrage funds


Radhika Gupta, CEO, Edelweiss Asset Management Ltd, has over 12 years of experience in domestic and global asset management across investments, sales and distribution. Prior to this, she was with Edelweiss Global Asset Management as business head – multi strategy funds.

As the Business Head, she was responsible for setting the strategic direction for the team’s investment, distribution and platform. Her experience spans across product development, investments and sales distribution for national distributors, private banks, wealth managers and IFAs.

Prior to joining Edelweiss in 2014, she was a Portfolio Manager with the US based AQR Capital Management, now a $170 billion dollar asset manager, and a consultant with McKinsey & Company. She subsequently co-founded Forefront Capital Management Pvt. Ltd., a boutique PMS and AIF manager, which was acquired by Edelweiss in 2014. Radhika was an integral part of the acquisition of Forefront in 2014, the acquisition of the onshore business of JPMorgan Asset Management in 2016, and the acquisition of Ambit Alpha Fund in 2016.

Radhika is a graduate of the Jerome Fisher Program in Management and Technology from the University of Pennsylvania, receiving joint degrees in Economics from the Wharton School and Computer Science Engineering from the Moore School.


Since this is a trader’s forum, I have a question related to that… I am a bit curious to know what instruments(stocks, futures, options, bonds, etc) are used by arbitrage funds to generate arbitrage profits?



Hi!! I am sure every CEO/Asset Manager must be witnessing a diminishing returns from Arbitrage Funds on YoY basis. Do you see the trend reversing? Where do you expect new growth / arbitrage opportunities coming from?


hi @radhikagupta: Thanks for gracing this forum. Welcome and happy to have someone as renowned as you here.

I have a few questions so kindly bear with me.

  1. Under what conditions do Arbitrage funds earn greater than cash yield ? I would expect it to do better in easing cycles than tightening cycles. Is that always the case ?

  2. Why are these funds benchmarked to Equity indices in some cases instead of CRISIL Liquid Index for example.

  3. Apart from expense ratio, what are the other things that differentiate one arbitrage fund from another. What are the non - cost considerations of choosing one from another ?

  4. What is the typical capacity of these funds in terms of AUM

  5. How are Cash Liquid Fund returns different from Arbitrage Fund returns.

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Arbitrage Funds explore opportunities in equity futures market. Since the nature of this fund is equity more than 65% is invested in such equity arbitrage opportunities and remaining portion in invested in debt instruments.



Over the last 3 years arbitrage returns have shrinked in line with fall in risk free rates (interest rates). Going forward arbitrage spreads may move up inline with rise in interest rates.

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  1. If we compare arbitrage funds performance compared to liquid funds, arbitrage have scored higher on a post tax basis most of the time periods. In terms of market cycles, arbitrage opportunities increase during volatile market conditions.

  2. The right benchmark for pure arbitrage funds is Nifty 50 arbitrage index. most funds are benchmarked to this index.

  3. The efficiency at which the fund manager explores arbitrage opportunities in the market is key. Also, how one manages the debt portion of the portfoilio is important. A true to label arbitrage fund does not take credit or duration risk in its debt component and keeps the entire portfolio’s risk profile relatively lower.

  4. the size of arbitrage opportunities in the market is equivalent to open interest in the market. Last month the open interest was around 1.18 lakh crore.

  5. Liquid fund returns depend on the money market rates while arbitrage returns depend on spread between equity cash and futures market. Both could be different in the short term.


@radhikagupta: Thanks for the answers. I have a few followups - kindly clarify with your inputs.

  1. Wont in a steeper yield curve the further future be more discounted from spot ? Also if the short term volatility is higher yield curve will likely steepen. Which one according to you means more for Arbitraguers ?

  2. Can you please explain a bit more ? I was thinking there will be client wise position limits on how much a AMC can hold of the total OI in the market for futures. Wont this limit the total capacity of the fund ? I am assuming that you execute inhouse.


Hello @radhikagupta thanks for the AMA.

This is quite an interesting topic and have a few questions, thanks in advance.

  1. Do arbitrage funds make use use of only equity and futures or are options used too?
  2. What do the funds do in case arbitrage opportunities don’t arise and how is the cash component utilized?
  3. I’ve often come across statements that these funds are relatively risk free and are suited for beginners, would you say thats a fair characterization of funds?
  4. I was reading a few articles and I read that these funds came our unscathed during the 2008 crisis. How do such profound bear markets impact arbitrage funds?
  5. Is there any presentation, docx you can share where I can see the average return these funds have generated over the years?
  6. Has the scheme re-categorization process impacted these funds?

@radhikagupta what and how do arbitrage funds trade on a daily basis?

  1. Does the fund looks for difference in prices in different exchange and therefore take the trade one security from one exchange into another exchange and earn a profit on the difference found?

  2. .How fast are the transactions?Is this trading manual ? If yes how do you guys take care of latency in this fast automated world?

  3. For these arbitrage trades, do each trade pay taxes like retail traders do?

  4. Tell us more about your world. I would like to know what a arbitrage fund looks like on paper…on data… and on perspective as well.



Why should i buy Arbitrage funds when other thematic funds are making upto 10% returns and Arbitrage funds are making upto 5% returns ?



  1. Is there a reason Arbitrage fund returns seem to be correlated to interest rates? Shouldnt they be independent of interest rates?
  2. For retail investors, what technical risks are present when parking money in Arbitrage funds compared to an FD? Hypothetically, what happens to the next day’s NAV if there is a market crash of 50%, and what happens if a large percentage (say 40%) of the AUM is redeemed over 2-3 days?

Hi @radhikagupta,

Thanks for doing the AMA. Few questions:

  1. What infrastructure is required to figure out arbitrage opportunities and how HFT’s have affected the return opportunities for arbitrage funds?

  2. What is the typical position size for each trade?

  3. How much the latency and distance from the exchange give an advantage over the others in terms of executing arbitrage trades for the funds?

  4. What percentage of your tasks or management function in terms of finding opportunities and trading on that is automated?

Thanks in advance for the answer…


Is the process of Arbitrage funds similar to what short is to Hedge funds? Selling overvalued stocks after borrowing and buying them back when prices fall, pay back the money and keep the difference?

Pardon me if I am wrong in my understanding. I am new to the world of funds and finance.


Hi @radhikagupta,

Thanks for doing the AMA!

What does a typical trading day look like for an arbitrage fund manager?



Arbitrage spreads are more depended on short term/overnight rates. Inverted yield curve lead by higher short term rates shall definitely improve spreads.

Mutual funds have to limit position upto 10% in each stock arbitrage opportunity.



  1. Arbitrage funds use only equity and futures.
  2. In such situations such funds can increase their debt investments
  3. Yes as the funds dont carry any open equity exposure it is good for beginners for their short term parking needs.
  4. There were not pure arbitrage funds in 2008. May be one or two.
  5. Please refer
  6. Scheme recategorisation has no impact on arbitrage funds


The mostly spend time of searching arbitrage opportunities and deploy funds efficiently across such opportunities. They also take a call on how much to invest in debt.



No arbitrage funds just explore risk free opportunities between different markets such as cash equity and futures.



In india HFTs are not used widely hence, they have had not impact till now

Position size depends on the size of the fund. mostly in the range of 2 to 4 percent

Mutual fund trades are executed by brokers