InvestorQ : What is the difference between a Hybrid fund, a hedge fund, and an arbitrage fund?
Pratik vyas made post

What is the difference between a Hybrid fund, a hedge fund, and an arbitrage fund?

Pratik vyas answered.
2 years ago
Once we understand their way of workings and incentives, we will be able to understand the distinctions between the three funds.

Hybrid funds- Hybrid funds invest in a mix of debt and equity. It gives investors the opportunity to diversify their portfolio through a single investment vehicle. The ratio of stocks and bonds can remain fixed or may vary equivalently over time. The main intent behind these funds is to give investors the best of both worlds - equity and debt. Such funds ensure capital protection to some extent and bring modest returns. They are less risky than equity funds, but more so than debt funds. The mixed exposure has an impact on the returns they bring as well. As an investor in hybrid funds, you are likely to get higher returns than with debt funds. But the returns may be lower than with equity funds. Hybrid funds have a stated objective, such as conservative, moderate, or aggressive. The fund manager will allocate investors’ money in varying proportions in equity and debt as per the fund’s investment objective.

Hedge Fund: A hedge fund is an alternative investment vehicle available only to sophisticated investors, such as institutions and individuals with significant assets. A hedge fund is typically structured as a limited partnership. Hedge funds can invest in anything from real estate to currencies and other alternative assets; this is one of many ways in which hedge funds differ from mutual funds, which normally only invest in stocks or bonds. The aim of all hedge funds is to maximize investor returns and eliminate risk, regardless of whether the market is going up or down. While every hedge fund will have its own specified investment strategy, the aim is to implement certain trading tactics, such as shorting stocks (if they anticipate a drop in the market) or 'hedging' themselves by going long (if they foresee a market rise).

Arbitrage funds- Arbitrage schemes are hybrid funds, that take arbitrage positions in equity and related instruments for at least 65% of the portfolio. The remaining corpus is mostly in high-quality fixed-income instruments and cash & equivalents. These funds take advantage of market movements and price differences in two different markets. Namely, the cash or spot market and futures market. Also, the price differences are very minute. Hence the fund manager has to be efficient in identifying such opportunities in the market. The profits are realized over a medium time horizon. The medium-term investment horizon handles the volatility risk. The volatility risk usually arises due to equity exposure. The portfolio manager identifies the arbitrage opportunity and takes a position to align with the fund’s objective.