Why arbitrage funds all look identical — measured
Thirty-two times tighter than small caps. Ranking them by past return sorts on noise.
Compare thirty arbitrage funds and you will struggle to tell them apart. That isn't a failure of your analysis. It's a real property of the category, and it's measurable.
Across the arbitrage funds in our universe, the middle half sits within a band of 0.27 percentage points of one-year return. For small-cap funds the equivalent band is 8.79 points — thirty-two times wider.
The measurement
| Category | Funds | Q1 | Median | Q3 | Interquartile spread |
|---|---|---|---|---|---|
| Arbitrage | 33 | 6.38% | 6.55% | 6.66% | 0.27 pt |
| Flexi Cap | 38 | 1.85% | 4.39% | 8.37% | 6.52 pt |
| ELSS | 49 | 0.08% | 3.87% | 7.04% | 6.96 pt |
| Small Cap | 30 | 5.09% | 9.34% | 13.88% | 8.79 pt |
Thirty-one of the thirty-three arbitrage funds returned between 5.21% and 7.53% over the year, and the tenth-to-ninetieth percentile band runs just 6.14% to 6.96%.
Why the category behaves this way
An arbitrage fund isn't trying to pick winners. It captures the price difference between a stock in the cash market and its futures contract, holding offsetting positions so the directional exposure cancels out.
That difference — the basis — is set by market-wide conditions: interest rates, and how much demand there is to carry leveraged long positions. Every arbitrage fund is fishing in the same pool, and the pool has a size that no manager controls.
So the achievable return is largely a market rate, not a skill outcome. Managers differ in execution quality, cost, and how much they hold in debt when arbitrage opportunities are thin — and those differences show up, but as fractions of a percentage point.
What actually differentiates them
With returns clustered this tightly, the expense ratio becomes proportionally much more important. A 0.3 percentage point difference in cost is a rounding error against small-cap dispersion of nearly nine points. Against an interquartile spread of 0.27 points, it's the whole game.
The same is true of overnight and liquid funds
Arbitrage isn't unique. Overnight funds in our data spanned 0.00% to 5.58% over the year, and liquid funds 0.00% to 6.49% — and in both cases the low end is dominated by funds with incomplete history rather than by genuine underperformance. The bulk of each category sits in a narrow band for the same structural reason: the return is a market rate.
A consequence we ran into ourselves
This has a practical side-effect worth mentioning, because it affected this site.
Our per-fund pages are generated from the same template for every fund. For categories with genuine dispersion, the numbers on each page differ enough that the pages read as distinct documents. For arbitrage funds — where the returns, the volatility and the risk profile are near-identical — the resulting pages are genuinely very similar to one another.
Search engines noticed before we did, flagging several arbitrage and short-duration fund pages as near-duplicates. They were right. When the underlying reality is that thirty funds are nearly the same, thirty honest pages describing them will be nearly the same too.
What to do with this
Mostly, adjust what you look at. Ranking arbitrage funds by past one-year return sorts on noise — the differences are inside the range you'd expect from execution timing alone.
Cost, fund size and how consistently the fund has stayed close to its category are more durable distinctions than a return ranking that will reshuffle next quarter. Our fund pages show category rank alongside the raw return for exactly this reason: rank 3 of 33 sounds meaningful until you see the whole category fits inside a third of a percentage point.
Key takeaways
- The interquartile spread of arbitrage fund one-year returns was 0.27 points; small caps 8.79.
- Arbitrage return is a market rate set by the cash-futures basis, not a skill outcome.
- With returns this tight, the expense ratio dominates what differentiates funds.
- Overnight and liquid funds cluster for the same structural reason.
- Category rank in a uniform category is close to meaningless — check the spread before reading a rank.
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Browse today's scan →This guide reports measured statistics from public AMFI NAV data for a single date. Fund names appear only as illustrations of a measurement effect and are not recommendations. Past performance does not indicate future results. This is not investment advice.