AMENDED AND RESTATED EXPENSE WAIVER AND REIMBURSEMENT AGREEMENT


     THIS  AGREEMENT is made this 22nd day of May,  2002,  between The Arbitrage
Funds, a Delaware trust (the "Trust") and Water Island Capital,  LLC, a Delaware
limited liability company (hereinafter called the "Adviser").

                               W I T N E S S E T H

     WHEREAS, the Adviser has entered into an Investment Advisory Agreement with
the Trust,  pursuant to which the Adviser agrees to provide,  or arrange for the
provision of, investment advisory and management services to the Trust; and

     WHEREAS, the Trust and the Adviser believe that capping the total expenses,
excluding  taxes,  interest and dividends on short  positions,  of shares of The
Arbitrage  Fund (the "Fund") of the Trust will enable the Fund to target  niches
within the load and no-load product market and will benefit the Fund;

     NOW, THEREFORE, the parties hereto do hereby agree as follows:

1. EXPENSE WAIVER AND REIMBURSEMENT BY THE ADVISER.  The Adviser agrees to waive
all or a portion of its management fee and, if necessary,  to bear certain other
expenses, excluding taxes, interest and dividends on short positions, associated
with operating the Fund to the extent  necessary to limit the Fund's  annualized
expenses to the annual rate of 1.95% of average  daily net assets for the period
from the date of this Agreement until August 31, 2012.

2. DUTY OF FUND TO  REIMBURSE.  The Fund agrees to  reimburse  the Adviser  such
waived fees (but not expenses borne) in later years provided,  however, that the
Fund is not  obligated  to pay any such  waived fees more than three years after
the end of the fiscal year in which the fee was waived.

3.  ASSIGNMENT.  No  assignment of this  Agreement  shall be made by the Adviser
without the prior consent of the Trust.

4. DURATION AND  TERMINATION.  This Agreement  shall be effective for the period
from the date of this  Agreement  until August 31, 2012,  and shall  continue in
effect thereafter unless terminated by either of the parties hereto upon written
notice  to  the  other  of  not  less  than  five  days.  This  Agreement  shall
automatically   terminate  upon  the  termination  of  the  Investment  Advisory
Agreement.

     IN WITNESS  WHEREOF,  the parties hereto have executed this Agreement as of
the date first above written.


THE ARBITRAGE FUNDS                               WATER ISLAND CAPITAL, LLC

By /s/ John S. Orrico                             By /s/ John S. Orrico
   --------------------------                        --------------------------
Name:   John S. Orrico                               Name:   John S. Orrico
Title:  President                                    Title:  President