Arbitrage is the simultaneous buying and selling of the same underlying security or its derivatives in different market segments to generate risk-free profits. If the price of the same item is different in different markets, you can make a risk-free profit by buying the item in the market where the price is lower and at the same time selling it in the market where the price is higher. It is important that buying and selling transactions are executed at the same time so that you can secure profits and not be exposed to price risks. Since arbitrageurs aim to make risk-free profits, long and short positions are fully (100%) hedged. In the case of cash (or debt plans), profits are taxed in STCG for a maximum period of three years. If you retire three years ago, your profits will be collected with your income and the tax will be paid at the marginal rate. Hedge funds take advantage of the price difference between assets that should theoretically have the same price. Chances are you haven`t heard of hedge funds. That`s because they`re not like your typical mutual funds. Unlike other funds, hedge funds place large orders and take advantage of price differences for the same security in different markets. This allows investors to take advantage of market volatility without taking too much risk. While they may seem appealing, it`s always a good idea to sit down with a financial professional to discuss how hedge funds can fit into your investment portfolio.

The budgetary efficiency of hedge funds contributes to the relevance of these funds in a context of market volatility. Investors may consider investing a portion of their investment portfolio in hedge funds to manage volatile market movements and earn reasonable returns. Should investors stay away because of their recent performance? “They may still make sense for some investors, depending on their tax bracket and investment horizon. At this point, however, debt funds that invest in short-term securities could do better,” said Malhar Majumder, a partner at Positive Vibes Consulting and Advisory, a firm that distributes financial products. The benefits these funds offer investors include: If you have already invested in riskier options such as equity funds, you can begin a systematic transfer plan (STP) of equity funds to a less risky safe haven such as hedge funds as you approach achieving your financial goals. This would not only reduce the overall risk of your portfolio, but also reduce the return at the same time. You can`t expect double-digit returns in hedge funds. In addition, the fund may impose exit charges for a period of 30 to 60 days to deter investors from exiting early. All of these costs can result in an increase in the fund`s expense ratio. A high expense ratio puts pressure on your net returns. Excessive time spent in bonds can significantly reduce the fund`s profitability, so actively managed equity funds outperform hedge funds over the long term.

Investors should note that returns on equity hedge funds are lower. Similar to what liquid funds give, not what equity funds give. In addition, these funds operate on the basis of arbitrage opportunities. While this hasn`t happened yet, in the long run, as these funds` assets grow, there may be fewer arbitrage opportunities. ABCL and ABC Companies are active in a wide range of activities in the financial services sector. You understand and acknowledge that Aditya Birla Money Limited (“ABML”), Aditya Birla Finance Limited (“ABFL”) and Aditya Birla Sun Life Asset Management Company Limited and trustees and limited partners of the Aditya Birla Sun Life Fund group companies (“ABSLMF”) and ABML/ABFL also acts as distributor of ABSLPF. Any recommendation or reference to ABSLMF systems, if made or referenced on the Website, is based on the standard evaluation and selection process, which would apply uniformly to all mutual fund plans. You are free to choose the execution facilities in the manner deemed appropriate and ABSLMF will not pay any commission to ABML/ABFL if you decide to execute a transaction with ABSLMF on the Website, unless you and ABML/ABFL have agreed otherwise separately. Information about ABML/ABFL, its operations and details of the commission structure to be obtained from asset management companies at ABML/ABFL are also available on the respective website.

Hedge funds strive to misvalue stocks in the spot and futures market. It typically uses price differences between current and future securities to achieve maximum returns. The fund manager simultaneously buys shares on the spot market and sells them on the futures or derivatives markets. The difference between the cost price and the selling price is the return you earn. Your right to use the Facilities is your personal responsibility; Accordingly, you agree not to resell or commercially exploit the facilities. In addition, the website welcomes your feedback as a user of the facilities. Any feedback you provide becomes confidential and proprietary information of the Site, and you agree that the Site may use all comments, suggestions, complaints and other comments you give regarding the Site in any manner and without restriction. The Site has a worldwide, royalty-free, non-exclusive, perpetual, irrevocable right to use the Feedback for any purpose, including, but not limited to, incorporating such Feedback into the Site or other software or installations of the Site.

Hedge funds benefit from price differences in different markets. You can buy shares on the spot market and sell those shares on the futures market. This is because the main types of arbitrage occur between these two markets, albeit very small. As a result, hedge funds have to execute a large number of trades each year to make substantial profits. Suppose the stock of an ABC company is trading at Rs 1,220 on the spot market and Rs 1,235 on the futures market. The fund manager buys ABC shares on the spot market for Rs 1,220 and sorts a futures contract to sell the shares for Rs 1,235. Towards the end of the month, when prices match, the fund manager will sell the shares on the futures market and make a risk-free profit of Rs 15 per share less transaction costs. These funds must invest at least 65% of the portfolio in equities and equity-related instruments. Due to the nature of hedge funds, the portfolio will tend to consist primarily of hedged exposures.

Simply put, this means that long exposures to securities with a short position in the futures segment or on another exchange are hedged. The 2020 calendar year was not good for hedge funds. Most of them had their worst monthly performance in May 2020, where they recorded negative returns. One-year category returns — the average returns of all hedge funds — also fell to 3.6% as of Jan. 1, 2021, according to Value Research data. Over the past three and five years, these funds have posted annualized returns of 5.1% and 5.6%, respectively. Assuming that X shares trade at Rs 100 on the BSE and Rs 101 on the NSE, the fund manager would simultaneously buy them on the BSE and sell them on the NSE for Rs 101, making a profit of Rs 1. Similarly, the fund manager can buy a share at a spot price of Rs 1,000 on the spot market and simultaneously sell it at Rs 1,002 in the futures market, making a profit of Rs 2 over the term of the contract. When choosing a fund, it is best to analyze it from different angles.

Several quantitative and qualitative parameters can help you determine the best trade-off. In addition, it would be helpful to keep an eye on your financial goals, risk tolerance and investment horizon. Cost is becoming an important consideration in the valuation of hedge funds.