Quant Arbitrage Fund – Direct (G) : NFO Details

The quant Arbitrage Fund, launched by quant Mutual Fund, is an open-ended hybrid scheme focused on generating capital appreciation and income through arbitrage opportunities in equity markets' cash and derivative segments. It also invests in debt and money market instruments. The New Fund Offer (NFO) is open from 18th March 2025 to 1st April 2025, with a minimum subscription amount of Rs. 5,000. There is no assurance that the investment objective of the scheme will be achieved.

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Details of the NFO: Quant Arbitrage Fund – Direct (G)

Investment Objective and Strategy

Objective:

The investment objective of the Quant Arbitrage Fund – Direct (G) is to generate capital appreciation and income by predominantly investing in arbitrage opportunities in the cash and the derivative segments of the equity markets and the arbitrage opportunities available within the derivative segment and by investing the balance in debt and money market instruments. There is no assurance that the investment objective of the scheme will be achieved.

Investment Strategy:

The Quant Arbitrage Fund – Direct (G) will be actively managed. The Fund Manager would identify arbitrage opportunities and execute the deals simultaneously in both the markets. In terms of the SEBI guidelines, the Scheme shall not short sell in the cash market at all times. The debt component of the Scheme would be invested in debt securities and money market instruments. The duration of the debt portfolio would primarily be managed with a view to generate income with minimum interest rate risk. Some of the arbitrage strategies that may be adopted by the fund manager from time to time include:

Cash-Future Arbitrage: Arbitrage captures the spread, between the price of a stock in the spot market and in the futures market on a market neutral basis. If the price of a stock in the futures market is higher than in the spot market, after adjusting for taxes and other costs the Scheme may buy the stock in the spot market and sell the same stock in equal quantity in the futures market simultaneously. This enables to the fund to earn the cost of carry between the stock and the futures of the stock. 

If the futures are quoting at a discount to the price in the cash market before the expiry the trade may be reversed by buying the futures and selling the shares in the cash market which, will enhance the profit potential to the extent of discount between future as compared to cash market. Normally the price between cash and future segment tend to converge on the expiry day. The cash and future trade would be reversed on the expiry day to book the locked arbitrage profit.

Rolling over of the futures transaction: Rolling over of the futures transaction means:

1) Unwinding the short position in the futures and simultaneously selling futures of a subsequent month; and

2) Holding onto the spot position.

There could also be instances of unwinding both the spot and the future position before the expiry of the current month future if it proves advantageous or to meet redemption. If suitable arbitrage opportunities are not available in the opinion of the Fund Manager, the Scheme may invest in short term debt and money market securities. The Fund Manager will evaluate the difference between the price of a stock in the futures market and in the spot market. If the price of a stock in the futures market is higher than in the spot market, after adjusting for costs and taxes the scheme shall buy the stock in the spot market and sell the same stock in equal quantity in the futures market, simultaneously. The Scheme would also look to avail of opportunities between one futures contract and another. The margin money requirement for the purposes of derivative exposure will be held in the form of Term Deposits, cash or cash equivalents.

Index Arbitrage: The Nifty 50 derives its value from fifty constituent stocks; the constituent stocks (in their respective weights) can be used to create a synthetic index matching the Nifty Index. Also, theoretically, the fair value of a future is equal to the spot price plus the cost of carry. Theoretically, therefore, the pricing of Nifty Index futures should be equal to the pricing of the synthetic index created by futures on the underlying stocks. Due to market imperfections, the index futures may not exactly correspond to the synthetic index futures. The Nifty Index futures normally trades at a discount to the synthetic Index due to large volumes of stock hedging being done using the Nifty Index futures giving rise to arbitrage opportunities. One instance in which an index arbitrage opportunity exists is when Index future is trading at a discount to the index (spot) and the futures of the constituent stocks are trading at a cumulative premium. The fund manager shall endeavour to capture such arbitrage opportunities by taking long positions in the Nifty Index futures and short positions in the synthetic index (constituent stock futures). Based on the opportunity, the reverse position can also be initiated.

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Portfolio protection hedging: The Scheme may use exchange-traded derivatives to hedge the equity portfolio. The fund manager shall either use index futures and options or stock futures and options to hedge the stocks in the portfolio. The fund would endeavour to generate alpha by superior stock selection and removing market risks by selling appropriate index or taking tactical view of market direction. Illustrations of hedging using options–

Call Option (Buy): The fund buys a call option at the strike price of say ₹1000 and pays a premium of say ₹50, the fund would earn profits if the market price of the stock at the time of expiry of the option is more than 1050 being the total of the strike price and the premium thereon. If on the date of expiry of the option the stock price is below ₹ 1000, the fund will not exercise the option while it loses the premium of ₹50.

Put Option (Buy): The fund buys a Put Option at ₹1000 by paying a premium of say ₹50. If the stock price goes down to ₹900, the fund
would protect its downside and would only have to bear the premium of ₹50 instead of a loss of ₹100 whereas if the stock price moves up to say ₹1100 the fund may let the Option expire and forego the premium thereby capturing ₹100 upside after bearing the premium of ₹50. The Scheme may use both index and stock futures and options to hedge the stocks in the portfolio.

Covered Call Strategy: The fund manager may use the covered call strategy by writing call options against an equivalent long position in the underlying security thereby locking in the returns instead of keeping the position open. This strategy allows fund managers to earn premium income in addition to returns locked in from the long underlying. The objective of the strategy is to earn the option premium. This strategy allows the Fund Manager to reduce downside risk (to extent of premium received), thereby resulting in better risk adjusted returns for the Scheme. Covered calls although has inherent risk of loss of upside.

Hedging and alpha strategy :The fund will use exchange-traded derivatives to hedge the equity portfolio. The fund manager shall either use index futures and options or stock futures and options to hedge the stocks in the portfolio. The fund will seek to generate alpha by superior stock selection and removing market risks by selling appropriate index. For example, one can seek to generate positive alpha by buying an IT stock and selling CNXIT Index future or buying a bank stock and selling Bank Index futures or buying a stock and selling the Nifty Index.

Calendar Spread: Under this strategy, the Scheme attempts to extract and profit from the spread (the difference between buying and selling price) created between two derivative contracts (eg. Futures) of the same underlying instrument but with different expiries

Other Derivative Strategies: As allowed under the SEBI guidelines on derivatives, the fund manager will employ various other  stock and index derivative strategies by buying or selling stock/index futures and/or options. For eg. trading strategy that involves matching a long position with a short position in two stock futures with a high correlation.