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

37 Pages Posted: 3 Nov 2008

See all articles by Jacob Boudoukh

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah; AQR Capital Management, LLC

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2000

Abstract

This paper demonstrates that an an institutional feature inherent in amultitude of mutual funds managing billions in assets generates fund NAVs that reect stale prices. Since, in many cases, investors can trade at these NAVs with little or no transactions costs, there is an obvious tradingopportunity. 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 matchedby 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 ofinternational 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. and Whitelaw, Robert F., The Last Great Arbitrage: Exploiting the Buy-and-Hold Mutual Fund Investor (May 2000). NYU Working Paper No. FIN-00-009. Available at SSRN: https://ssrn.com/abstract=1294626

Jacob Boudoukh (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

Robert F. Whitelaw

New York University ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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