Question

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What risks cannot be covered by arbitrage?

Answer 1

Arbitrage funds are most commonly sold as risk-free assets. They are pitched as if they will give only positive and no negative returns. In another way, they are sold as a sure way of earning absolute returns. But, in reality, arbitrage have their own risks and uncertainties which should always be considered while investing.

Some of them include:

1. The perfect execution of arbitrage opportunities is one arena of risk. They should be handled by someone who is having the market expertise and can provide returns to the customers.

2. Liquidity of stocks market: The arbitrage stocks, if are not liquid enough, will not give perfect returns and thus can become non-asset for the user.