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Just Shoot Me

Bala, 28, Gordon Gekko in the making, pseudo-intellectual, cynic, bibliophile, obsessive compulsive ranter...

Why Arbitrage is not cool?

March 31, 2007

Dear stock market investor,

Given the recent volatility in the indian markets, lot of people are now talking about Arbitrage and investing in arbitrage mutual funds. Arbitraging looks sexy on paper, but it takes enormous amounts of guts and self control to actually make decent money out of it. Let me list a few reasons why it is not sexy?

1) Arbitraging requires a great amount of leveraging. Your account has to be deep enough to bear heavy Mark to Market calls. A common mistake arbitragers make is over leveraging and getting your margin calls triggered. Even nobel economic price winners make this mistake.

2) Price convergence happens sooner or later or maybe never. Not everyone has deep enough pockets or conviction to sit through till it happens. In India, the usual derivative contract period is a month. Holding on to a position, switching to the next month series time and again requires great conviction, patience and perseverance and you are not as tough as you think you are.

3) Arbitraging opportunities are not common. (at least those which promise a good spread). Great volatility comes maybe once a year. For every good month there will be many bad and mediocre months

4)Indian Arbitrage Mutual Funds have expense ratios similar to Equity funds whereas their returns are comparable to Debt/liquid funds. Considering this, your money is better off in the bank. And read the fund fact sheet carefully - you will find whatever gains an indian arbitrage MF scheme shows, would have come mostly from their equity holdings

5)Arbitraging places a lot of faith in acts of god. And the guess what happens to people who believe in God?


posted by Bala, 9:55 AM


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