Stale Prices and Strategies for Trading Mutual Funds
Posted: 16 Apr 2003
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
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