Advantages of Arbitrage Funds
1. Lower Risk: Arbitrage funds typically have a low level of risk for the investor. Because each security is bought and sold at the same time, there is essentially no risk associated with longer-term investments.
Arbitrage funds may also invest a portion of their capital in debt instruments, which are generally seen as fairly stable. When there is a scarcity of attractive arbitrage deals, funds increase their debt exposure. This makes this form of investment particularly enticing to investors who have a low risk tolerance.
These funds are among the few low-risk investments that thrive during periods of significant market volatility, which can cause investor worry. When prices are volatile, the difference between the cash and futures markets widens. Individual stock values do not fluctuate significantly in a highly stable market. When markets are tranquil, investors have no reason to anticipate stock values will be much different from current levels in a month’s time.
Volatility and risk are inextricably linked. Volatility is required for large gains or losses. Arbitrage funds are a fantastic option for conservative investors looking to profit from a turbulent market without taking on too much risk.
2. Taxed as Equity Funds: Although arbitrage funds generally invest in equities, they are technically balanced or hybrid funds since they invest in both debt and equity. As a result, they are taxed as equity funds because long equity accounts for at least 65% of the portfolio on average.
3. Low Expense Ratios: Arbitrage funds typically offer lower expense ratios than actively managed equities funds, allowing investors to continue to receive more of their returns.
4. Consistent Returns: Arbitrage funds typically offer consistent, moderate returns. They seek consistency when it comes to performance rather than vigorous capital building, which may appeal to risk-averse investors.