An arbitrage fund is a kind of mutual fund that attracts investors who want to take advantage of volatile markets without taking too much risk. It is crucial to understand how they work and whether they make sense for your portfolio before investing in one. Arbitrage funds work by exploiting the price differential between assets that should theoretically have the same price. One of the most important types of arbitrage takes place between the cash and futures markets. Arbitrage funds also invest part of their capital in debt securities that are generally regarded as highly stable. The fund invests more heavily in debt when there is a shortage of profitable arbitrage trades. This makes this type of fund very attractive to low-risk investors.