Why are most Funds Open-end? Competition and the Limits of Arbitrage

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Why are most Funds Open-end? Competition and the Limits of Arbitrage

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Jeremy C. Stein

Abstract

The majority of asset-management intermediaries (e.g., mutual funds, hedge funds) are structured on an open-end basis, even though it appears that the open-end form can be a serious impediment to arbitrage. I argue that when funds compete to attract investors' dollars, the equilibrium degree of open-ending in an economy can be excessive from the point of view of these investors. One implication of the analysis is that, even absent short-sales constraints or other frictions, economically large mispricings can coexist with rational, competitive arbitrageurs who earn small excess returns. © 2005 MIT Press

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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 120 (2005)
Issue (Month): 1 (January)
Pages: 247-272
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Handle: RePEc:tpr:qjecon:v:120:y:2005:i:1:p:247-272

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Robin Greenwood & Samuel Hanson & Jeremy C. Stein, 2008. "A Gap-Filling Theory of Corporate Debt Maturity Choice," NBER Working Papers 14087, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Christopher J. Neely & Paul A. Weller, 2007. "Central bank intervention with limited arbitrage," Working Papers 2006-033, Federal Reserve Bank of St. Louis. [Downloadable!]
Other versions:
- Christopher J. Neely & Paul A. Weller, 2007. "Central bank intervention with limited arbitrage," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 249-260. [Downloadable!]
Ulf Axelson & Per Stromberg & Michael S. Weisbach, 2007. "Why are Buyouts Levered: The Financial Structure of Private Equity Funds," NBER Working Papers 12826, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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- Ulf Axelson & Per Strömberg & Michael S. Weisbach, 2009. "Why Are Buyouts Levered? The Financial Structure of Private Equity Funds," Journal of Finance, American Finance Association, vol. 64(4), pages 1549-1582, 08. [Downloadable!] (restricted)

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