Quarterly Journal of Economics Vol. 120 No. 1 2005
Why are Most Funds Open-End? Competition and the Limits of Arbitrage
Abstract
The majority of asset-management intermediaries (e.g., mutual funds, hedge funds) are structured on an open-end basis, even though it appears that the open-end form can be a serious impediment to arbitrage. I argue that when funds compete to attract investors' dollars, the equilibrium degree of open-ending in an economy can be excessive from the point of view of these investors. One implication of the analysis is that, even absent short-sales constraints or other frictions, economically large mispricings can coexist with rational, competitive arbitrageurs who earn small excess returns.
- DOI
- 10.1162/0033553053327489
- Volume
- 120
- Issue
- 1
- Pages
- 247-272
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref