Experts warn against NAV volatility in arbitrage funds
NSE's new closing auction system triggers fluctuations in arbitrage fund valuations.
1NAV spikes observed
Following the implementation of National Stock Exchange's Closing Auction Session (CAS), arbitrage funds experienced significant daily NAV fluctuations. On August 5, 2026, some funds recorded NAV jumps up to 2%. Fund managers attribute these movements to temporary valuation effects. The new system has reportedly widened bid-ask spreads in the market, creating unusual pricing patterns that affect arbitrage strategies.
2Strategy execution challenges
The auction mechanism introduces timing mismatches in simultaneous hedge executions. Price convergence in the last 30 minutes of trading disrupts traditional arbitrage models. Index arbitrage funds face particular difficulties as the new system alters price discovery dynamics. Market makers report increased operational complexity in maintaining delta-neutral positions under the revised framework.
3Short-term trading risks
Financial advisors caution investors against attempting short-term arbitrage on these NAV movements. SEBI-registered analysts emphasize that current volatility doesn't reflect fundamental values. Industry experts recommend maintaining at least 6-12 month investment horizons. Historical data shows arbitrage funds typically deliver 7-9% annual returns over longer periods, despite interim fluctuations.
4Market adaptation timeline
Full market adjustment to the new auction system may take 3-6 months. Major asset management companies have begun updating their algorithmic models. NSE officials maintain the system will improve liquidity once fully absorbed. Comparisons are being drawn with BSE's similar mechanism implemented in 2025 to predict stabilization patterns.
5Regulatory developments
Market participants closely monitor potential SEBI interventions. This change marks the second major shift for arbitrage funds after 2024's leverage restrictions. Analysts anticipate possible refinements to auction timing rules. The regulatory focus remains on maintaining orderly markets while accommodating technological upgrades in trading infrastructure.
6Alternative investment options
For risk-averse investors, financial planners suggest considering low-volatility debt funds or hybrid instruments. Target date funds (TDFs) gain attention for those with 1-3 year horizons. Diversification across asset classes becomes increasingly important in the current environment. Several wealth managers report heightened client inquiries about capital preservation strategies.
7Global arbitrage context
India's developments are analyzed against global benchmarks. While the US VIX index averages 18% in 2026, emerging markets often exceed 25%. London-based Preqin data shows global arbitrage funds delivered 11.2% average returns in 2025, compared to 9.7% in Asia-Pacific. These metrics help contextualize India's current transition period.
8Long-term outlook
Industry consensus maintains current volatility represents temporary adjustment pains. The fundamental advantage of market-neutral arbitrage strategies remains intact long-term. Investors are advised to maintain disciplined approaches rather than react to short-term noise. Most analysts expect more stable performance metrics to emerge in the next quarter.
Original article: Economic Times — Uzmanlar arbitraj fonlarında NAV dalgalanmalarına karşı uyarıyor