Market neutral - profits from price discrepancies between index, ETF, futures, and constituent stocks
| Strategy Type | Index Arbitrage / ETF Arbitrage / Futures Basis Trading |
| Market Outlook | Market neutral - profits from price discrepancies between index, ETF, futures, and constituent stocks |
| Risk Profile | Lower Market Risk (hedged), Higher Execution Risk |
| Reward Profile | Small but consistent gains from arbitrage spreads |
| Time Horizon | Very Short-term (Intraday to Days) |
| Iv Environment | Works in all conditions; opportunities increase during volatility |
| Breakeven | Spread exceeds transaction costs |
| Primary Instruments | ISF.L (iShares FTSE 100 ETF), FTSE 100 Futures (Z), FTSE 100 constituent stocks |
| Mas Compliance | MAS regulated brokers required; futures and ETF trading permitted |
| Trading Hours | London: 4 PM - 12:30 AM SGT; Futures extended hours available |
| Contract Size | FTSE 100 Futures: £10 per point; ETF: Variable |
| Settlement | Futures: Cash settled; ETF: T+2; Stocks: T+2 |
| Tax Treatment | No capital gains tax for individuals in Singapore |
| Stamp Duty | 0.5% on UK stock purchases; ETFs may vary; Futures exempt |
| Cdp Account | Not required for foreign instruments; custody with broker |
| Singapore Relevance | Index arbitrage provides market-neutral returns uncorrelated to Singapore market |
Index arbitrage exploits price differences between related instruments (ETF, futures, stocks) that should trade at equivalent values. Long the cheap instrument, short the expensive one. Profit when they converge.
ETF premium is when the ETF trades above its Net Asset Value (NAV). The ETF is 'expensive' vs its underlying holdings. Arbitrageurs short ETF and long basket/futures to capture the spread.
Basis = Futures Price - Spot Price. Should equal cost of carry (interest minus dividends). Deviations create opportunity. Contango = positive basis (normal). Backwardation = negative basis.
Long one instrument, short equivalent value of another. Both track the same index. Market moves cancel out. Only the spread between them matters for profit.
Small but consistent: 0.1-0.3% per trade net of costs. High win rate (70%+). Annualized 3-6% with moderate frequency. Low risk, low reward per trade.
Trading stocks being added/removed from index. Additions face buying pressure (index funds must buy). Deletions face selling. Trade 1-5 days before effective date. Can capture 1-5%.
Exploiting timing around ex-dividend. Stocks receive dividends, futures don't. Basis adjusts. Can capture mispricing around ex-dates. More complex, smaller opportunity.
Much cheaper: no stamp duty (0.5%), tiny bid-ask (~0.01%), one trade vs 100, lower commissions. Futures are the preferred hedge for retail arb.
Trade spread between ETFs tracking same index (ISF.L vs VUKE.L). When their premiums/discounts diverge, long cheap ETF, short expensive. Convergence captures spread.
ETF: 0.05-0.10% per leg. Futures: 0.02-0.05%. Stocks: 0.6-0.7% (stamp duty!). Need gross spread to exceed costs. ETF vs Futures arb is cheapest.
Fair Value = Spot × (1 + (r - d) × t). r = interest rate (SONIA/LIBOR). d = dividend yield. t = time to expiry in years. Compare to actual futures price for basis deviation.
Execution risk (slippage), basis risk (imperfect hedge), dividend uncertainty, liquidity risk, counterparty risk. Hedging reduces but doesn't eliminate risk. Quantify and monitor.
HFT captures small spreads in milliseconds. Retail can't compete on speed. Focus on: larger spreads, longer horizons (reconstitution), volatility events where HFT may pull back.
Long one futures expiry, short another (e.g., long June, short September). Captures term structure changes or roll premium. Lower margin than outright. Less directional risk.
Sharpe (target >1.0), win rate (target >70%), average P/L per trade, gross vs net returns, slippage, attribution by arb type. Review weekly/monthly.
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