Title: Why are most funds open-end?
Description: "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"--National Bureau of Economic Research web site.
Subjects: Arbitrage, Hedge funds, Mutual funds