What is Arbitrage PMS?
Arbitrage PMS strategies exploit price differences between identical or related securities. The most common is cash-futures arbitrage: buy stock in cash market while simultaneously selling the same stock's futures contract, locking in the spread as risk-free income. Returns are typically 9–13% p.a. post-tax with near-zero market risk.
- Near-Zero Market Risk: Long cash + short futures = perfectly hedged position
- Tax Efficiency: Arbitrage gains taxed as equity (15% STCG vs. 30% for debt)
- Better than Liquid Funds: 9–13% post-tax vs. 6–7% for liquid mutual funds
- Consistent Returns: Returns determined by futures premium, not market direction
- Capital Protection: Very low probability of capital loss in pure arbitrage
Types of Arbitrage Strategies
Different arbitrage opportunities PMS managers exploit:
- Cash-Futures Arb: Buy spot, sell futures at F&O expiry premium (most common)
- Merger Arbitrage: Buy target company post M&A announcement; hedge acquirer
- Rights Issue Arb: Trade between ex-rights and cum-rights price differential
- ETF Arbitrage: Trade ETF NAV vs. underlying basket price divergence
- Statistical Arb: Pairs of correlated stocks that temporarily diverge