Stale Prices and Strategies for Trading Mutual Funds

Posted: 16 Apr 2003

See all articles by Matthew P. Richardson

Matthew P. Richardson

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

Robert Whitelaw

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

Jacob Boudoukh

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

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Abstract

We demonstrate that an institutional feature of numerous mutual funds - funds managing billions in assets - generates fund net asset values that reflect stale prices. Because investors can trade at these NAVs with limited transaction costs in many cases, obvious trading opportunities exist. These opportunities are especially prevalent in funds that buy Japanese or European equities. Simple, feasible strategies generate Sharpe ratios (excess return divided by standard deviation) that are many times greater than the Sharpe ratio of the underlying fund. We illustrate the potential of the strategy for three Vanguard Group mutual funds. A particular issue to keep in mind is that when implemented, the gains from these strategies are matched by offsetting losses incurred by buy-and-hold investors in these funds.

Keywords: Portfolio Management: trading and execution, Portfolio Management: private client focus

Suggested Citation

Richardson, Matthew P. and Whitelaw, Robert F. and Boudoukh, Jacob and Subrahmanyam, Marti G., Stale Prices and Strategies for Trading Mutual Funds. Financial Analysts Journal, Vol. 58, No. 4, 2002. Available at SSRN: https://ssrn.com/abstract=377281

Matthew P. Richardson

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

44 West 4th Street
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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

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

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)

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