TY  - JOUR
AU  - Stein,Jeremy C.
TI  - Why Are Most Funds Open-End? Competition and the Limits of Arbitrage
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10259
PY  - 2004
Y2  - February 2004
UR  - http://www.nber.org/papers/w10259
L1  - http://www.nber.org/papers/w10259.pdf
N1  - Author contact info:
Jeremy C. Stein
Department of Economics
Harvard University
Littauer 209
Cambridge, MA  02138
Tel: 617/496-6455
Fax: 617/496-7352
E-Mail: jeremy_stein@harvard.edu
AB  - 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 the equilibrium degree of open-ending in an economy can be excessive from the point of view of investors. When funds compete for investors' dollars, they may engage in a counterproductive race towards the open-end form, even though this form leaves them ill-suited to undertaking certain types of arbitrage trades. 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.
ER  -