This paper demonstrates that an an institutional feature inherentinamultitude of mutual funds managing billions in assets generates fund NAVs that re ect 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 ininternational 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 di erent 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 Consider the following quote from U.S. News & World Report (May 24, 1999, p.74): You'd think Frank Chiang would have been happy to see $7 millio
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