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HDFC Arbitrage Fund
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Investment Objective
To generate income through arbitrage opportunities between cash and derivative market and arbitrage opportunities within the derivative segment and by deployment of surplus cash in debt securities and money market instruments.
Basic Scheme Information
| Nature of Scheme |
Open Ended Equity Scheme |
| Inception Date |
October 23, 2007 |
| Option/Plan |
Wholesale Plan and Retail Plan - Both Plan offers Dividend and Growth Option. Dividend Option offers Quarterly Dividend Option with Payout and Reinvestment Facility. |
Entry Load
(purchase / additional purchase / switch-in)
(click here for SIP Details)
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NIL
(With effect from August 1, 2009)
Please click here to go through the addendum. |
Exit Load
(as a % of the Applicable NAV)
(click here for SIP Details)
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Retail Plan and Wholesale Plan:
- In respect of each purchase / switchin of units, an Exit Load of 1.00% is payable if Units are redeemed / switched-out within 1 year from the date of allotment.
- No Exit Load is payable if Units are redeemed / switched-out after 1 year from the date of allotment.
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Minimum Application Amount
(click here for SIP Details)
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Retail Plan : New/ Existing investors
Growth Option /Quarterly Dividend Option : Rs.5000 and any amount thereafter.
Wholesale Plan : New/ Existing investors
Growth /Dividend Option : Rs. 1 Crore any amount thereafter.
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| Lock-In-Period |
Nil |
| Net Asset Value Periodicity |
Every Business Day. |
| Redemption Proceeds |
Within 10 working days. |
Tax Benefits
(As per present Laws) |
Please click for details |
Current Expense Ratio (#)
(Effective Date 22nd May 2009) |
Regular Plan - 1.00%
Wholesale Plan - 0.75%
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| (#) Any change in the expense ratio will be updated within two working days. |
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Plan Name |
NAV Date |
NAV Amount |
| Retail Plan - Growth option | 29 Jul 2010 | 11.8040 | | Retail Plan - Dividend Option | 29 Jul 2010 | 10.2540 | | Retail Plan - Quarterly Dividend Option | 29 Jul 2010 | 10.6050 | | Wholesale Plan - Growth option | 29 Jul 2010 | 11.8870 | | Wholesale Plan - Dividend Option | 29 Jul 2010 | 10.2100 | | Wholesale Plan - Quarterly Dividend Option | 29 Jul 2010 | 10.3540 |
Investment Pattern
The asset allocation under the respective Plans will be as follows :
| Type of Instruments |
Minimum Allocation
(% of Net Assets) |
Maximum Allocation
(% of Net Assets) |
Risk Profile of
the Instrument |
| Equity and Equity Related Instruments |
65% |
90% |
Medium to High |
| Derivative including index futures, stock futures, Index Options and Stock Options etc. # |
65% |
90% |
Medium to High |
| Debt Securities and Money Market Instruments* and Fixed Income Derivative |
10% |
35% |
Low to Medium |
When adequate arbitrage opportunities are not available in the Derivative and equity markets, the asset allocation of the scheme's portfolio will be as follows :
| Type of Instruments |
Minimum Allocation
(% of Net Assets) |
Maximum Allocation
(% of Net Assets) |
Risk Profile of
the Instrument |
| Equity and Equity Related Instruments |
0% |
65% |
Medium to High |
| Derivative including index futures, stock futures, Index Options and Stock Options etc. # |
0% |
65% |
Medium to High |
| Debt Securities and Money Market Instruments* and Fixed Income Derivative |
35% |
100% |
Low to Medium |
* Investments in securitised debt shall not normally exceed 50% of the net assets of the scheme.
# The exposure to derivative shown in the above asset allocation table is exposure taken against the underlying equity investments and should not be considered for calculating the total asset allocation. The idea is not to take additional asset allocation with the use of derivative. The margin money deployed on these positions would be included in Money Market category.
The Scheme may seek investment opportunity in the Foreign Securities, in accordance with guidelines stipulated in this regard by SEBI and RBI from time to time. Under normal circumstances, the Scheme shall not have an exposure of more than 75% of its assets in foreign securities (including bonds, mutual funds and other approved instruments) subject to regulatory limits.
Investment Strategy
The equity derivative markets have experienced enormous growth during the last few years. The market provides ability to the investor to derive returns from the implied cost of carry between the underlying and the derivatives market. This provides an opportunity to provide returns, possibly higher than the shortterm interest rate without taking the market risk. Implied cost of carry and mis-pricing across the spot, futures and options markets can lead to profitable arbitrage opportunities. The Scheme would carry out simple strategies, which would be to take offsetting positions on various markets simultaneously. The overall risk the Scheme would carry would be that of being market neutral i.e. no specific equity risk. However, when such opportunities are not available, the scheme may invest in short term debt or money market securities. The Scheme would not attempt to leverage or have short positions.
The strategies, the Scheme may adopt could be as under. The list is not exhaustive and the Scheme could use similar strategies as available in the markets.
Domestic Trades
Index / Stock spot - Index / Stock Futures.
The pricing of the futures is derived from underlying Nifty spot or the underlying stock. It is the cost of carry that binds the value of the futures to the underlying portfolio. When the two go out of sync, there are opportunities.
The cost of carry binds the futures price to the price of the underlying asset. The price of the futures at any given instance should typically be more than the level of Nifty at that point. Theoretically, the fair value of the futures is equal to the price of the underlying plus the cost of carry i.e. the interest rate prevailing for an equivalent credit risk, in this case is the Clearing Corporation of the Exchange. Cash and carry trades at times provide higher than the prevailing interest rates. There is an opportunity to exploit by selling the overpriced futures and buying the underlying portfolio. It may also happen that the Index / Stock Future may be at a discount. In such cases, the Scheme may buy the future and sell the stock after borrowing the same. The Scheme shall enter into a combination of the transactions simultaneously.
Example of the Derivative Strategies
• Stock Spot Vs Stock Futures
Suppose on 25-01-2007 the Scheme buys 10,000 shares of XYZ on spot @ Rs. 144.80/- and at the same time sells 10,000 XYZ Futures for February 2007 expiry (February 22, 2007) @ Rs. 146.35/-. The Scheme thus enters into a fully hedged transaction by selling the long position in the futures market for expiry in February 2007. The transaction also enables the Scheme to earn an annualised return of 13.95% (before all expenses), provided that the Scheme holds the securities till expiry.
• Index Spot Vs Index Futures
Suppose the current month Nifty Spot is 4300 and Nifty Index Future is trading at 4338 i.e. at a premium of 0.90% to the spot, the Scheme will buy the basket of index stocks in the cash market and sell the index future at 4338 thus capturing the spread of Rs. 38 (i.e. 4338-4300). On expiry ideally Nifty Index Future should converge to the spot generating an annualized return of 10.80% (before all expenses).
If the Scheme has to unwind the positions prior to the expiry on account of redemptions or any other reason, the returns would depend on the spread between the spot and futures price at which the position is unwound.
If the price differential between the spot and futures position of the subsequent month maturity is attractive near the expiry date, then the scheme may rollover* the futures position and continue with the position in the spot market.
Rollover means unwinding the short position in the futures of the near month and simultaneously shorting the futures of the subsequent month.
The Scheme shall endeavour to deploy its assets through transactions in the above pattern, which may involve Index Futures with Stock Futures or Futures of the same stock with different expiry months. The investment pattern of the Scheme will reflect fully hedged position and at no point of time the Scheme will have any un-hedged position.
ADR / GDR - underlying shares
In two-way fungibility, depository receipts can be converted into underlying domestic shares and local shares can be reconverted into depository receipts. The depository receipts could either be Global Depository Receipts (GDRs) or American Depository Receipts (ADRs). GDRs are listed on the London or the Luxembourg Stock Exchange, while ADRs are listed on the US exchanges like the New York Stock Exchange (NYSE) or the Nasdaq. Since every GDR / ADR has a given number of underlying shares, the number of shares qualifying for reconversion into GDRs / ADRs is limited to the number of shares, which were converted into local shares.
Say for instance that the ADR / GDR price is at a discount to the price of the underlying share. Converting the ADR / GDRs into the underlying shares can now result in a gain. If the ADR / GDR price is at a premium to the price of the underlying shares, then it makes sense to re-convert the underlying shares into depository receipts. All this is subject to headroom or the availability of shares for re-conversion. Say for example a particular company has issued 10 million ADRs with one underlying share per ADR. Two million ADRs have been reconverted into local shares. Therefore two million local shares can be converted to ADRs. Here the intention is to capture the spread due to mis pricing in ADR/GDR and the equivalent local shares, through simultaneous long or short positions.
Corporate Action / Event Driven Strategies
Dividend Arbitrage
Buy-Back Arbitrage
When the Company announces the buy-back of its own shares, there could be opportunities due to price differential in buyback price and traded price. Though every endeavor will be made to achieve the objectives of the Scheme, the AMC/Sponsors/Trustees do not guarantee that the investment objectives of the Scheme will be achieved. No guaranteed returns are being offered under the Scheme.
The Scheme may invest in other schemes managed by the AMC or in the schemes of any other mutual funds, provided it is in conformity with the investment objectives of the Scheme and in terms of the prevailing SEBI Regulations. As per the SEBI Regulations, no investment management fees will be charged for such investments and the aggregate inter scheme investment made by all the schemes of HDFC Mutual Fund or in the schemes of other mutual funds shall not exceed 5% of the net asset value of the HDFC Mutual Fund.
The Scheme may also invest in suitable investment avenues in overseas financial markets for the purpose of diversification, commensurate with the Scheme objectives and subject to necessary stipulations by SEBI / RBI. Towards this end, the Mutual Fund may also appoint overseas investment advisors and other service providers, as and when permissible under the regulations.
Debt Investments
The Scheme will retain the flexibility to invest in the entire range of debt securities and money market instruments. These instruments are more specifically highlighted below: Debt securities (in the form of non-convertible debentures, bonds, secured premium notes, zero interest bonds, deep discount bonds, floating rate bond / notes, securitised debt, pass through certificates, asset backed securities, mortgage backed securities and any other domestic fixed income securities including structured obligations etc.) include, but are not limited to:
1. Debt obligations of the Government of India, State and local Governments, Government Agencies and statutory bodies (which may or may not carry a state / central government guarantee),
2. Securities that have been guaranteed by Government of India and State Governments,
3. Securities issued by Corporate Entities (Public / Private sector undertakings),
4. Securities issued by Public / Private sector banks and development financial institutions.
Money Market Instruments include
1. Commercial papers
2. Commercial bills
3. Treasury bills
4. Government securities having an unexpired maturity upto one year
5. Collaterlised Borrowing & Lending Obligation (CBLO)
6. Certificate of deposit
7. Usance bills
8. Permitted securities under a repo / reverse repo agreement
9. Any other like instruments as may be permitted by RBI / SEBI from time to time
Investments will be made through secondary market purchases, initial public offers, other public offers, placements and right offers (including renunciation). The securities could be listed, unlisted, privately placed, secured / unsecured, rated / unrated of any maturity.
The AMC retains the flexibility to invest across all the securities / instruments in debt and money market.
Investment in debt securities will usually be in instruments which have been assessed as .high investment grade. by at least one credit rating agency authorised to carry out such activity under the applicable regulations. Pursuant to SEBI Circular No. MFD/ CIR/9/120/2000 dated November 24, 2000, the AMC may constitute committee(s) to approve proposals for investments in unrated debt instruments. The AMC Board and the Trustee shall approve the detailed parameters for such investments. The details of such investments would be communicated by the AMC to the Trustee in their periodical reports. It would also be clearly mentioned in the reports, how the parameters have been complied with. However, in case any unrated debt security does not fall under the parameters, the prior approval of Board of AMC and Trustee shall be sought. Investment in debt instruments shall generally have a low risk profile and those in money market instruments shall have an even lower risk profile. The maturity profile of debt instruments will be selected in accordance with the AMC.s view regarding current market conditions, interest rate outlook and the stability of ratings.
RISK CONTROL
Investments made from the net assets of the Scheme would be in accordance with the investment objective of the Scheme and the provisions of the SEBI Regulations. The AMC will strive to achieve the investment objective by way of a judicious portfolio mix comprising of Debt Securities and Money Market Instruments and equity / equity related instruments. Every investment opportunity in Debt Securities and Money Market Instruments would be assessed with regard to credit risk, interest rate risk and liquidity risk.
Credit Risk
A detailed credit evaluation of each investment opportunity will be undertaken. The AMC will utilise ratings of recognised rating agencies as an input in the decision making process. Investments in Debt Securities and Money Market Instruments will usually be in instruments that have been assigned high investment grade ratings by a recognised rating agency. In line with SEBI Circular No. MFD/CIR/9/120/ 2000 dated November 24, 2000, the AMC may constitute committee(s) to approve proposals for investments in unrated instruments. The AMC Board and the Trustee shall approve the detailed parameters for such investments. The details of such investments would be communicated by the AMC to the Trustee in their periodical reports. It would also be clearly mentioned in the reports, how the parameters have been complied with. However, in case any security does not fall under the parameters, the prior approval of Board of AMC and Trustee shall be sought.
Interest Rate Risk
An interest rate scenario analysis would be performed on an on-going basis, considering the impact of the developments on the macro-economic front and the demand and supply of funds. Based on the above analysis, the AMC would manage the investments of the Scheme on a dynamic basis to exploit emerging opportunities in the investment universe and manage risks at all points in time.
Liquidity Risk
The AMC will attempt to reduce liquidity risk by investing in securities that would result in a staggered maturity profile of the portfolio, investment in structured securities that provide easy liquidity and securities that have reasonable secondary market activity. In the event of a requirement to liquidate all or a substantial part of these investments in a very short duration of time, the AMC may not be able to realize the full value of these securities to an adverse impact on the Net Asset Value of the Scheme.
Fund Manager
Mr. Anil Bamboli (since Oct 23, 07)
Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities
| Portfolio - Holdings (as on June 30, 2010) | | Company / Issuer | Industry+ / Rating | % to NAV | | EQUITY & EQUITY RELATED | | | | Reliance Industries Ltd. | Petroleum Products | 3.87 | | Century Textiles & Industries Ltd. | Cement | 3.17 | | Reliance Infrastruture Ltd. | Power | 2.93 | | GTL Ltd. | Telecom - Equipment & Accessories | 2.91 | | IFCI Ltd. | Finance | 2.71 | | Reliance Communication Ltd. | Telecom - Services | 2.57 | | Essar Oil Ltd. | Petroleum Products | 2.33 | | Oil & Natural Gas Corporation Ltd. | Oil | 2.32 | | India Cements Ltd. | Cement | 1.90 | | Punj Lloyd Ltd. | Construction Project | 1.67 | | Total of Top Ten Equity Holdings | | 26.38 | | Total Money Market Instruments (aggregated holdings in a single issuer) | | 0.46 | | Short Term Deposits as margin for Futures & Options | | 25.18 | | Cash margin / Earmarked cash for Futures & Options | | 0.13 | | Other Cash, Cash Equivalents and Net Current Assets | | 3.56 | | Grand Total | | 100.00 | | Net Assets (Rs. In Lakhs) | | 53530.23 |
Note : $ Sponsor
Returns
| HDFC Arbitrage Fund Retail Option | (NAV as at evaluation date 30-June-2010, Rs. 11.728 Per unit) | | Date | Period | NAV Per Unit (Rs.) | Returns (%) ^ | Benchmark Returns (%) #
| | March 30, 2007 | Last 1188 days | N.A | N.A. | 6.44**
| | December 30, 2009 | Last Six months (182 days) | 11.508 | 1.91* | 1.93*
| | June 30, 2009 | Last 1 Year (365 days) | 11.295 | 3.83* | 3.29*
| | June 29, 2007 | Last 3 Years (1097 days) | N.A | N.A. | 6.13**
| | June 30, 2005 | Last 5 Years (1826 days) | N.A | N.A. | 6.2**
| | June 30, 2000 | Last 10 Years (3652 days) | N.A | N.A. | N.A.
| | October 23, 2007 | Since Inception (981 days) | 10.000 | 6.11** | 6.1**
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| HDFC Arbitrage Fund Wholesale Option | (NAV as at evaluation date 30-June-2010, Rs. 11.807 Per unit) | | Date | Period | NAV Per Unit (Rs.) | Returns (%) ^ | Benchmark Returns (%) #
| | March 30, 2007 | Last 1188 days | N.A | N.A. | 6.44**
| | December 30, 2009 | Last Six months (182 days) | 11.572 | 2.03* | 1.93*
| | June 30, 2009 | Last 1 Year (365 days) | 11.343 | 4.09* | 3.29*
| | June 29, 2007 | Last 3 Years (1097 days) | N.A | N.A. | 6.13**
| | June 30, 2005 | Last 5 Years (1826 days) | N.A | N.A. | 6.2**
| | June 30, 2000 | Last 10 Years (3652 days) | N.A | N.A. | N.A.
| | October 23, 2007 | Since Inception (981 days) | 10.000 | 6.38** | 6.1**
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* Absolute Returns ** Compounded Annualised Returns
# Index - CRISIL Liquid Fund Index
^ Past performance may or may not be sustained in the future
$$ Adjusted for the dividends declared under the scheme prior to its splitting into the Dividend and Growth Plans
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