Jio BlackRock Arbitrage Fund: What is it and how do the scheme's managers plan to invest?

What is Jio BlackRock Arbitrage Fund?

Jio BlackRock Arbitrage Fund is an open-ended and actively-managed hybrid scheme investing in arbitrage opportunities.

According to the draft papers, the scheme will aim to generate capital appreciation and income by predominantly investing in arbitrage opportunities in the cash and derivatives segment of the equity market, and by investing the balance in debt and money market instruments.

However, there is no assurance that the investment objectives of the scheme will be achieved.

The scheme will be benchmarked against Nifty 50 Arbitrage (TRI)

The scheme will be managed by Anand Shah, Haresh Mehta, Siddharth Deb and Arun Ramachandra.

Equity and equity-related instruments: Minimum 65% and maximum 100%

Debt and money market instruments, including the margin money deployed in derivative transactions: Minimum 0 and maximum 35%

Investment strategy: How will Jio BlackRock Arbitrage Fund invest?

The draft papers say that the scheme will "endeavour to invest in arbitrage opportunities between spot and futures prices of exchange traded equities and the arbitrage opportunities available within the derivative segment..."

However, if suitable arbitrage opportunities are not available in the opinion of the fund manager, then the scheme may invest in debt and money market securities.

Here are some key points from the draft papers about the investment strategy:

• 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 will endeavor to build similar market-neutral positions that offer an arbitrage potential, for e.g. buying the basket of index constituents in the cash or futures segment and selling the index futures, etc.

• The scheme would also look to avail of opportunities between one futures contract and another.

• The fund manager shall use derivatives within the permissible limits actively in addition to hedging and rebalancing the portfolio subject to the regulations and the investment objectives and the terms of the scheme set out elsewhere in this Scheme Information Document.

Apart from the above, the scheme may deploy one or more of the following strategies: cash futures arbitrage, index arbitrage, portfolio protection/hedging, calendar spread, corporate action/event-driven strategies, merger/risk arbitrage, convertible securities arbitrage (when available) and covered call strategy.

The scheme may also invest part of its portfolio in debt and money market instruments subject to permissible limits laid down under SEBI and will be guided by credit quality, liquidity, interest rate outlook.

The scheme will have an exposure to derivatives for hedging, portfolio balancing and optimising returns.

The debt and money market instruments include any margin money that has to be maintained for the derivative position. The margin money could also be maintained partly as fixed deposits with scheduled commercial banks.

"It's important to note that the above strategies are just examples, and the fund manager may adopt other strategies as well, depending on market conditions and regulatory compliance," the draft paper says.