Arbitrage funds slow to embrace Sebi's relaxed CAS exposure rules

The Securities and Exchange Board of India introduced regulatory relief for arbitrage funds by permitting a 1% increase in their permitted exposure to the cash and securities segment, a move designed to encourage greater participation from the ₹3 trillion mutual fund category. The rule change was intended to make arbitrage strategies more attractive to fund managers seeking diversification opportunities within their portfolio construction mandates.

However, market participants have been cautious in responding to the regulator's initiative. Arbitrage funds, which typically exploit price differentials between spot and futures markets, have not yet shown substantial interest in deploying additional capital under the relaxed framework, suggesting that alternative constraints or market dynamics may be limiting their appetite for expansion.

Industry observers attribute the muted response to various factors, including the current market conditions, competitive pressures within the arbitrage segment, and the strategic preferences of existing fund managers. The regulatory relief, while welcome, appears insufficient on its own to catalyze a notable shift in fund positioning or capital allocation strategies.

The Securities and Exchange Board's efforts to enhance flexibility within arbitrage fund mandates reflect broader efforts to strengthen participation across different mutual fund categories. Nevertheless, the subdued uptake indicates that regulatory adjustments alone may require complementary measures or improved market circumstances to translate into meaningful changes in fund behavior and investor interest.