Mutual Fund Arbitrage and Transaction Costs
Journal of Investing, Vol. 18, No. 2, pp. 57-61, Summer 2009
Posted: 22 May 2019
Date Written: June 15, 2009
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: Suggested Citation