International Funds Still Sitting Ducks For Arbs

A few weeks ago, I took foreign funds to task for hanging out an "Arbs Welcome" sign. These funds use stale prices to value their portfolios, thereby allowing arbitragers to make easy profits (at other shareholders' expense) by buying shares they know will rise with U.S. markets the next day.

I showed that shareholders in a dozen of these funds could have lost up to 2.5% of their assets overnight during a volatile two-day period in October 1997.

Since '97, some of these funds have removed the "Arbs Welcome" sign by improving portfolio valuation procedures, restricting frequent trading in fund shares and imposing redemption fees. But anecdotal and empirical evidence suggests that some of these efforts are half-hearted or ineffective and that the only solution to this problem may be regulatory action. ...