What Is an Arbitrage Fund?
Arbitrage funds aim for low-risk returns from price differences, with equity-like taxation. Here’s how they work.
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An arbitrage fund aims to earn low-risk returns by exploiting small price differences of the same asset in different markets — the practice of arbitrage. They’re often used as a relatively stable, tax-efficient parking place.
How they make money
The classic trade is cash-and-carry: the fund buys a stock in the cash market and simultaneously sells its futures contract when the futures price is higher. At expiry the two prices converge, locking in the gap as a near risk-free gain, regardless of market direction. This is called cash-and-carry arbitrage.
Why investors use them
- Low risk — positions are hedged, so returns don’t depend on the market rising or falling.
- Equity taxation — because they technically hold equity, arbitrage funds are taxed as equity funds, which can be more favourable than debt-fund taxation for some investors.
- Liquidity — useful for parking money for a few months, as an alternative to a liquid fund.
Points to note
Returns vary with the availability of arbitrage opportunities — they tend to be higher in volatile markets and lower when spreads are thin. They’re low-risk, not no-risk, and not a substitute for long-term equity. Taxation rules can change. Education only, not a recommendation.
