When a tokenized fund's trading price deviates from its net asset value (NAV) and arbitrage fails to close the gap, the root cause is that the assumptions behind the arbitrage mechanism no longer hold—either the link between primary and secondary markets is cut off, or the arbitrage path is blocked by compliance or liquidity constraints. Price deviation is essentially a symptom of market structure problems, not proof that the market is inefficient.
Core Reason for Price Deviation: Arbitrage Cannot Be Executed Effectively
Arbitrage convergence for tokenized funds depends on two conditions: shares can be freely minted and redeemed, and arbitrageurs have enough incentive and conditions to carry out trades. When either condition fails, price deviation may persist.
Barrier 1: Minting and redemption involve friction, making arbitrage too costly
If minting and redemption of fund tokens involve friction (such as high fees, minimum investment thresholds, or redemption delays), arbitrageurs cannot quickly profit from the price gap. Ondo Finance has clearly stated that the root cause of secondary-market price deviations is a high-friction minting and redemption mechanism that blocks effective arbitrage.
Barrier 2: Permissioned tokens restrict the counterparty range
Hong Kong's Securities and Futures Commission (SFC) explicitly requires in its April 2026 rules for secondary trading of tokenized funds that tokenized products use a permissioned design and restrict circulation through a whitelist mechanism. ChinaAMC's tokenized fund documents directly state that the system will use smart contracts to limit token transactions to registered wallets, preventing free transfers between unknown wallets. This means even if you find a price gap, you cannot execute arbitrage if your counterparty is not on the whitelist.
Barrier 3: Secondary-market liquidity is too shallow
Hong Kong's new rules require each tokenized product to have at least one market maker. However, the total size of Hong Kong tokenized funds is currently about USD 1.4 billion, or about USD 110 million per product on average, clearly small compared with mature ETF markets. Because of this small scale, market makers may be less willing to maintain two-way quotes during periods of low liquidity. Even if arbitrageurs want to enter, they may face execution risk from insufficient liquidity.
Historical Reference: Real Cases of Arbitrage Failure
Grayscale's trust products are classic cases of prices deviating from NAV over long periods. Its Chainlink Trust traded at a premium of more than 700% in March 2024, mainly because such trust products do not support real-time subscription and redemption like an ETF, so arbitrageurs cannot immediately profit from the price gap. Similarly, Grayscale Bitcoin Trust traded at a 48% discount at the end of 2022. Only when the product converted to an ETF and allowed redemptions could the price gap be eliminated.
These cases show that even if the underlying assets are completely real, prices can deviate from fair value for a long time as long as the arbitrage channel between primary and secondary markets is blocked.
Why Tokenized Funds Are Different: Why Convergence Is Harder
Unlike mature ETFs, tokenized funds are still in the early stage of institutional development:
Trading hours mismatch: Fund tokens can trade onchain 24/7, but the underlying assets (stocks, bonds) follow traditional market opening and closing hours. Although platforms such as Ondo have enabled continuous redemption, pricing of the underlying assets still depends on business-day valuations in traditional markets.
Evolving regulatory framework: Hong Kong is the first region to launch a complete framework for secondary trading of tokenized funds, but this system is still new and not yet a mature market. The pace of product expansion, market-making depth, and real trading demand still need to be tested.
Limited market-making willingness: Money market funds have a buy-and-hold nature that does not match secondary trading demand. Market makers may be unwilling to bear continuous quoting obligations in an illiquid environment.
Next Steps
If you observe that the price of a tokenized fund clearly deviates from NAV, before attempting arbitrage, check the following:
Whether the token supports free transfer in the secondary market—check whether the smart contract uses a whitelist mechanism.
Whether subscription and redemption are accessible—confirm whether minting/redemption has minimum limits, high fees, or delays.
Whether at least one market maker provides two-way quotes—Hong Kong's new rules require each product to have at least one market maker, but their willingness depends on product size and market depth.
Whether the price deviation is a temporary liquidity gap—the bid-ask spread quoted by market makers is a direct window for judging liquidity. If the above conditions are not met, the price deviation may persist. Arbitrage is not a viable strategy but a structural fact to note.
