The Last Great Arbitrage: Exploiting the Buy-and-Hold Mutual Fund Investor

37 Pages Posted: 13 Nov 2008

See all articles by Jacob Boudoukh

Jacob Boudoukh

Reichman University - Interdisciplinary Center (IDC) Herzliyah

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 2000

Abstract

This paper demonstrates that an an institutional feature inherent in a multitude of mutual funds managing billions in assets generates fund NAVs that reflect stale prices. Since, in many cases, investors can trade at these NAVs with little or no transactions costs, there is an obvious trading opportunity. Simple, feasible strategies generate Sharpe ratios that are sometimes one hundred times greater than the Sharpe ratio of the underlying fund. These opportunities are especially prevalent in international funds that buy Japanese or European equities and in funds that invest in thinly traded securities in the U.S. When implemented, the gains from these strategies are matched by o setting losses incurred by buy-and-hold investors in these funds. In one particular example, we explore the consequences of trading between different Vanguard mutual funds, motivated via the rules inherent in University 403B plans. Compared to an equal-weighted buy-and-hold portfolio of international Vanguard funds with a 25% cumulative return, the strategy discussed in this paper produces a 139% return while being in the stock market less than 25% of the time!

Suggested Citation

Boudoukh, Jacob and Richardson, Matthew P. and Subrahmanyam, Marti G., The Last Great Arbitrage: Exploiting the Buy-and-Hold Mutual Fund Investor (May 2000). NYU Working Paper No. S-AM-00-04, Available at SSRN: https://ssrn.com/abstract=1300792

Jacob Boudoukh (Contact Author)

Reichman University - Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 4610101
Israel

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
+1 (212) 998-0349 (Phone)
212-995-4233 (Fax)

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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