Why Are Most Funds Open-End? Competition and the Limits of Arbitrage*
Quarterly Journal of Economics
2005
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 the equilibrium degree of open-ending in an economy can be excessive from the point of view of investors. When funds compete for investors' dollars, they may engage in a counterproductive race towards the open-end form, even though this form leaves them ill-suited to undertaking certain types of arbitrage trades. 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/qjec.2005.120.1.247
- Volume
- 120 (1)
- Pages
- 247-272
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref