The Last Great Arbitrage: Exploiting the Buy-and-Hold Mutual Fund Investor
May 2000
Jacob Boudoukh, M.P. Richardson, M. Subrahmanyam and R.F. Whitelaw
ABSTRACT
This paper demonstrates that an an institutional feature inherent in a multitude of mutual funds managing billions
in assets generates fund NAVs that reflect stale prices. Since, in many cases, investors can trade at these NAVs
with little or no transactions costs, there is an obvious trading opportunity. 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 matched
by 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 of international 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!
Subject: Investments/Portfolio Choice
Classification: Empirical
Jacob Boudoukh
Institution: Stern School of Business, New York University
Email: jboudouk@stern.nyu.edu
Telephone: (212) 998-0305
Home Page: http://www.stern.nyu.edu/~jboudouk/
Matthew Richardson
Institution: Stern School of Business, New York University
Email: mrichar0@stern.nyu.edu
Telephone: (212) 998-0349
Home Page: http://www.stern.nyu.edu/~mrichar0/
Marti G. Subrahmanyam
Institution: Stern School of Business, New York University
Email: msubrahm@stern.nyu.edu
Telephone: (212) 998-0348
Robert Whitelaw
Institution: Stern School of Business, New York University
Email: rwhitela@stern.nyu.edu
Telephone: (212) 998-0338
Home Page: http://www.stern.nyu.edu/~rwhitela/
To download a copy of this paper click here
To request a copy of this paper click here
The Finance Department Working Paper Series has been generously sponsored by