Mutual Fund Arbitrage and Transaction Costs

Journal of Investing, Vol. 18, No. 2, pp. 57-61, Summer 2009

https://doi.org/10.3905/JOI.2009.18.2.057

Posted: 22 May 2019

See all articles by John A. Haslem

John A. Haslem

University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 15, 2009

Abstract

The 2003 mutual funds scandal that exploded upon the public revealed something that had long been known to insiders: Mutual fund advisers often approve and allow frequent trading, frequent trading arbitrage, and late trading arbitrage to selected traders. To increase adviser profits, fund advisers often require approved arbitrage traders to make "sticky asset" purchases of fund shares to "grow" fund assets. These costly mutual fund adviser practices increase transaction costs along several dimensions and lower current fund and shareholder assets, along with opportunity costs of dilution in fund share values and returns to long-term shareholders. Independent directors have either not been informed or have acquiesced in the decisions. In any case, independent directors have not performed their primary fiduciary duty as "shareholder watchdogs".

Keywords: mutual funds, advisers, frequent trading, frequent trading arbitrage, late trading arbitrage, transaction costs, fiduciary duty, opportunity costs of dilution

JEL Classification: G2, G23, G28

Suggested Citation

Haslem, John A., Mutual Fund Arbitrage and Transaction Costs (June 15, 2009). Journal of Investing, Vol. 18, No. 2, pp. 57-61, Summer 2009. Available at SSRN: https://ssrn.com/abstract=1419739

John A. Haslem (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742
United States
202-387 2025 (Phone)

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