Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds
Eric Zitzewitz ()
Research Papers from Stanford University, Graduate School of Business
As is becoming increasingly widely known, mutual funds often calculate their net asset values using stale prices, which causes their daily returns to be predictable. By trading on this predictability, investors can earn 35-70 percent per year in international funds and 10-25 percent in asset classes such as small-cap equity and high-yield and convertible bonds. These abnormal returns come at the expense of long-term share-holders, dilution of whom has grown in international funds from 56 basis points in 1998-9 to 114 basis points in 2001. Despite these losses and pressure from the SEC, the vast majority of funds are not market-updating their prices to eliminate NAV predictability and dilution, but are instead pursuing solutions that are only partly effective. The speed and ecacy of a fund's actions to protect shareholders from dilution is negatively correlated with its expense ratios and the share of insiders on its board, suggesting that agency problems may be the root cause of the arbitrage problem.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
Journal Article: Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:1749
Access Statistics for this paper
More papers in Research Papers from Stanford University, Graduate School of Business Contact information at EDIRC.
Bibliographic data for series maintained by ().