Volatility is good news for investors in arbitrage funds as their returns go up during periods of market turmoil.
This is because arbitrage funds generate returns by harnessing the price differential between the cash and futures market— they buy in the cash market and sell in the futures market.
This cash-futures difference widens during volatility. Of late, average absolute returns from arbitrage funds have jumped (see chart) and in September it was at 0.7514% (9% annualised ..