Arbitrage funds are reporting temporary NAV fluctuations following the new Closing Auction Session (CAS) rules effective August 3, 2026. This change has created a timing disconnect between cash and derivative markets, leading to artificial mark-to-market swings. While unsettling for daily performance, experts clarify these are accounting adjustments that should stabilize as the market adapts to the new mechanism.
Investors in arbitrage funds may have noticed unusual movements in their fund's Net Asset Value (NAV) over the past few days. This volatility follows the implementation of a new Closing Auction Session (CAS) for F&O-eligible stocks, which began on August 3, 2026. The new system was designed to improve price discovery, but it has created unexpected short-term effects for funds that rely on the price difference between the cash and derivatives markets.
Previously, closing prices for stocks were calculated using a 30-minute Volume Weighted Average Price (VWAP) method, which occurred between 3:00 PM and 3:30 PM. The new rules replace this with a single equilibrium price determined through an auction held between 3:15 PM and 3:35 PM.
This shift has created a timing gap. The cash market now closes following the auction at 3:35 PM, while the equity futures market continues trading until 3:40 PM. Because arbitrage funds use the official closing prices to calculate their daily NAV, these slight timing differences can cause artificial spikes or drops in the fund's daily value. These swings are often just accounting adjustments rather than actual changes in the profitability of the fund's underlying trading strategies.
For instance, if the cash market closing price is temporarily higher or lower than the futures market price due to the auction process, it can create a 'mark-to-market' deviation. Fund managers emphasize that these fluctuations are temporary and should normalize as the market adjusts to the new trading timeline. Investors redeeming their units on days with high volatility might see their returns impacted by these artificial distortions.
Beyond the immediate daily volatility, market participants suggest there could be a long-term impact on overall returns. The new auction process may limit the window for traders to capture price differences that traditionally occurred in the final minutes of continuous trading. Some analysts estimate that this change could lead to a modest reduction in annualized returns by up to 50 basis points.
Given the current transition period, experts suggest that investors may want to focus on longer-term performance rather than daily NAV changes. Extending holding periods to three to six months or more may help investors look past the temporary noise caused by this structural market change. The key monitorable for investors will be how effectively trading strategies adapt to this new auction mechanism over the coming weeks.