Arbs I

Articles by Fund Democracy: Archives

Your International Fund May Have the "Arbs Welcome " Sign Out, TheStreet.com (June 10, 2000).

Abstract: A number of funds have standing invitations to arbitrageurs to line their pockets at the expense of fund shareholders. These funds sometimes use stale price to calculate their net asset values, thereby giving arbitrageurs an opportunity to buy shares at prices that they know will rise the next day. You might call this unfair. But it can and does happen in the heavily regulated world of mutual funds, where it goes by the civilized name of "dilution." In some cases, funds can lose 2% or 3% of their assets to arbitrageurs overnight, and this loss is due solely to the funds' lax pricing policies. (View the full text of this article, free of charge.)

There are a number of ways to protect shareholders against arbitrageurs, but many funds probably won't bother with them until the SEC makes them. Federal law requires funds to update their prices, known as "fair value pricing," when market prices are stale, but the SEC staff has done little to enforce this rule. The staff apparently is waiting for shareholders to notice that arbitrageurs are walking off with their hard-earned savings. If you would rather the SEC staff act than wait, then let the staff know!