AUS
NZ
UK
CA
USA
FRA
GER
ESP
ITA
NLD
PRT
SWE
GRC
IND
POL
BRA
ZAF
RUS
CHN
UAE
Highlights
- NAV arbitrage exploits price differences between a fund’s market price and its net asset value.
- It involves buying undervalued shares and selling overvalued shares to capture profits.
- This strategy helps improve market efficiency by aligning prices with true asset values.
NAV arbitrage, short for net asset value arbitrage, is a financial strategy used primarily by investors and traders to capitalize on discrepancies between the market price of a fund’s shares and the underlying net asset value (NAV) of its assets. The NAV represents the per-share value of the fund’s holdings, calculated by dividing the total value of all assets minus liabilities by the number of shares outstanding. When a fund’s shares trade at a price different from this intrinsic value, arbitrage opportunities arise.
The core principle behind NAV arbitrage is to identify when the market price of a fund’s shares is either below or above its NAV. If shares are trading at a discount to the NAV, an arbitrageur may buy shares at the lower price, expecting the price to eventually converge with the true NAV, thus realizing a profit. Conversely, if shares trade at a premium, the investor may sell shares or short the fund, betting that the price will decline toward the NAV.
This practice is commonly seen in closed-end funds, exchange-traded funds (ETFs), and other investment vehicles where market prices can fluctuate independently of the underlying assets’ values due to supply-demand imbalances, investor sentiment, or market inefficiencies. NAV arbitrage plays a crucial role in correcting these price deviations and promoting fairer, more efficient markets.
By exploiting these pricing gaps, NAV arbitrageurs provide liquidity and help reduce the disparity between market price and NAV, ensuring that securities better reflect their fundamental value. However, this strategy requires careful analysis, timing, and understanding of market dynamics, as risks include changes in asset values, transaction costs, and market volatility.
Conclusion
NAV arbitrage serves as an important mechanism for aligning market prices with underlying asset values. Through strategic buying and selling, it enhances market efficiency and provides investors with opportunities to realize gains from price imbalances.
