InvestorQ : Can you explain to me what is meant by negative arbitrage spreads? Kotak has recently issued a warning about negative arbitrage spreads?
Anjana Aiyar made post

Can you explain to me what is meant by negative arbitrage spreads? Kotak has recently issued a warning about negative arbitrage spreads?

Answer
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Deepa Salunkhe answered.
3 months ago


Kotak mutual fund has issued a warning to its distributors to be cautious about the arbitrage spreads turned negative for the first time in almost 10 years. A spread is a difference between the price of a stock and the price of its futures contract and that is normally positive. Kotak MF highlighted that the arbitrage industry had swelled to a significant size of the total open interest leaving less opportunities on the table for such funds to generate good returns. The arbitrage industry is pegged at Rs.80,000 crore. Compression in arbitrage spreads had previously hit the mutual fund industry at the end of March causing some fund houses to temporarily halt inflows. Arbitrage funds typically give returns in line with short-term interest rates and that has been falling with successive rate cuts and liquidity easing by RBI. The note has indicated that the negative spread has put the recent rally into question.