Technology has, undoubtedly, made lives easy for most of us. But in the stock market it seems to have cut both ways. Faster trading systems may have enabled finer price discovery, but that has come at a cost. The price apparently paid by arbitrage funds in India. Goldman Sachs, which gained a larger mutual fund footprint by acquiring Benchmark AMC, has thrown in the towel and shut its arbitrage schemes.
Arbitrage refers to the simultaneous buying and selling of the same stock in different markets to profit from the prevailing price difference. Given that the opportunity to profit from price fluctuations between the NSE and the BSE has almost become extinct, most of the existing arbitrage is between the cash and the derivatives segment.
Devendra Nevgi, founder, Delta Global, says that last year has been difficult for mutual fund inflows across schemes. “In all strategies, the cost of capital is very important. The lack of availability of capital for private arbitrageurs has led to a downturn in the segment.”
Goldman Sachs AMC refused to comment for this story, but in an notice issued to investors it stated, “The advent of technology has considerably reduced the price anomalies available. This has resulted in arbitrage opportunities shrinking drastically over the years.”
Once seen by the funds as a risk-free activity, arbitrage has not only seen lower returns, the average assets under management in such schemes has also shrunk from Rs 146.46 crore in March 2011 to Rs 33.43 crore in December 2012.
Does Goldman’s decision then portend an ill-omen for other similar schemes? Says Chintan Haria, fund manager, ICICI Prudential AMC (its arbitrage fund had an AUM of Rs 32.14 crore as of Q3FY13), “Arbitrage is basically created by people’s perception about a particular stock; there will be no dearth of arbitrage opportunities as long as the market remains open.” Haria also adds that the Goldman closure might have had more than a technology angle. As Goldman’s arbitrage AUM was minuscule, an international fund its size may have felt that the administrative and regulatory hassle was not worth going through.
Rupesh Nagda, head, investments and products, Alchemy Capital, says arbitrage is no longer a risk-free activity and disagrees with Haria’s sanguine view. “Arbitrage funds may be less risk-prone than liquid funds, but they are not risk-free either. The performers will continue till investors use them for their tax advantage, but after a while they will exhaust themselves.” If one takes into account the dismal return generated by these funds in the recent past and the falling AUM, that could well be an eventuality.