The Indian arm of Goldman Sachs Asset Management has emerged as the first local mutual fund to succumb to the depleting arbitrage opportunities in the stock market. Goldman Sachs Asset Management has decided to wind down two of its arbitrage products — Goldman Sachs Derivatives Fund and Goldman Sachs Equity and Derivatives Opportunities — which had assets worth less than Rs 10 crore between the two of them. Goldman Sachs managed assets worth Rs 4,785 crore during the quarter ended December 2012.
The fund house said in a notice that “the advent of technology in the stock markets” has considerably reduced the time required to take advantage of price anomalies available between the cash and derivatives markets. “This has resulted in arbitrage opportunities shrinking drastically over the years. This, together with schemes’ performance profile, has resulted in a sharp reduction in demand for both the schemes,” Goldman said.
A senior Goldman Sachs official declined to comment. The two axed Goldman schemes were originally part of the Benchmark Asset Management, which Goldman Sachs acquired in March 2011.
|TAKING A HIT
- Goldman Sachs Derivatives Fund and Goldman Sachs Equity and Derivatives Opportunities have been scrapped
- The two schemes had assets worth less than Rs 10 crore
- Arbitrage schemes typically benefit from price anomalies between shares and futures contracts
- The advent of computerised trading has made it difficult for fund managers to identify opportunities as the automated system captures the price differences early
- Arbitrage schemes are increasingly turning unviable to manage because of the shrinking asset sizes
Arbitrage schemes aim to benefit from price anomalies between shares and futures contracts. The advent of computerised trading has made it difficult for fund managers to identify opportunities as the automated system captures the price differences early.
As a result, many of these schemes have not been able to deliver returns even as much as short-term debt or money market products, considered their surrogate. Industry officials said assets under management (AUM) of arbitrage schemes have fallen from Rs 1,000 crore in 2010 to an average of Rs 300-400 crore in 2012.
|Largest arbitrage schemes in AUM
||Assets (Rs cr)
|Kotak Equity Arbitrage
|IDFC Arbitrage Plan A
|SBI Arbitrage Opportunities
|Smallest arbitrage schemes in AUM
|Reliance Arbitrage Advantage
|Birla Sun Life Enhanced Arbitrage
|AUM as on Sept 30, 2012;
Source: Value Research
According to mutual fund industry officials, arbitrage schemes are increasingly turning unviable to manage because of the shrinking asset sizes, although many schemes are performing as well as short-term debt schemes. They expect a few more of such products with insignificant AUMs to wind down.
The arbitrage fund category has returned 9.2 per cent on an average in 2012, while short-term debt schemes fetched 9.85 per cent returns in the period. In 2009 and 2010, this category delivered 4.5-6 per cent returns compared to eight per cent by short-term debt schemes. This category fetched average returns of seven to eight per cent during the peak of the bull run between 2006 and 2008 with the better performers fetching 10-11 per cent.
A section of the risk-averse investors may continue to stay with performers in the arbitrage scheme category because of the tax advantage over short-term debt products.
Arbitrage schemes put at least 65 per cent of their corpus in stocks, which help them qualify as equity products under taxation. As a result, this product is exempt from paying capital gains tax for investments beyond a year. Capital gains tax on redemption before one year is 15 per cent. For debt mutual funds, the long-term gain is taxed at 10 per cent without indexation and 20 per cent with indexation.