What is Arbitrage, And Why Should You be Using it?

Mar 11, 2021

Arbitrage is one of the most powerful investment strategies and tools at your disposal. Use it to level up your game, reduce risk, and more.

Financial Arbitrage

The concept of financial arbitrage is pretty simple. It is accessing capital at lower rates than you can invest it for. Then investing it for greater returns and profiting from the spread in between these rates. As well as being able to keep the full returns on any capital you use to participate alongside arbitraged funds. 

Examples of Arbitrage at Work

You’ve seen arbitrage at work your whole life. Maybe without even realizing it. You may have even engaged in various forms of arbitrage without really recognizing what it was. 

Many young entrepreneurs start out buying the ingredients for lemonade and then reselling that for a profit in front yard lemonade stands. Or at school they’ve traded Pokémon cards.

Others have grown up to buy and resell items on websites like eBay or Amazon. When you think about it, the largest corporations are all built on some form of arbitrage. Amazon and Walmart are classic examples of this. Walmart and Costco use their bulk buying power to acquire products extremely cheaply, and profit from their markups. 

It has also been done poorly by some big Wall Street funds and institutions. Blackrock, the world's largest asset manager, with almost $9T in assets under management ate some deep losses in 2020, and recently reported ongoing losses for their investors in their Total Return fund in 2021, despite just about every asset class surging upwards over the previous year.

Individuals who have grown tired of their jobs have often used a type of financial arbitrage to break the dynamics of their situation and get into real estate. They’ve often been able to use credit cards, lines of credit, mortgages and HELOCs to borrow at very low rates, and make a lot more in real estate. It’s not a very scalable method, but it has helped some break free. 

Another way to use this concept of arbitrage is to set up your own partnerships and investment funds. Raise capital from others, and invest it for greater returns. Some may be happy getting cash flow and 4% positive returns, while investing this pooled money for 10% or greater returns. 

Benefits Of Financial Arbitrage

The type of financial arbitrage mentioned above has a variety of benefits, including the following.

Scaling Your Investing & Income

Perhaps you have been doing well with your own investments, but have hit a plateau. Your capital is in play, but your earned income from a job isn’t giving you enough surplus income to take advantage of all of the opportunities out there. 

Arbitrage and setting up your own partnership or fund can help you quickly scale your investing and income and multiply your results. 

Optimizing Your Time

Even if you have been a successful small time operator, flipping houses, holding rentals or investing in mortgage notes or tax liens, active investing is limited by your personal time. By raising more capital and putting it to work in another fund, you free up the bulk of your time, while building your finances. You can focus on just one side – raising capital, while leaving all of the time consuming management for other experts.

Minimize Risk

There are many ways this strategy helps you minimize risk. It gets you off of the front line of liability, enables you to get into better assets, with better numbers, with other accredited investors. It helps you spread your risks and use leverage. 

Help Others

It empowers you to help others with their finances and to get consistent returns they otherwise couldn’t access alone. 

If you’ve already been raising money or working on your own fund, get in touch with us to find out how to put these funds to work for better returns with proven asset managers.

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund