Question

Would arbitrageurs be more effective at taking advantage of mis-pricings in the market if investors in the arbitrageurs’ funds were only able to observe the performance of these funds occasionally (let’s say once a quarter) instead of continuously as is true today? Why?

Answer 1

Arbitrageurs would have been more effective in taking advantage of the mispricing of the market, if the investors of the arbitrageur fund would have been able to access those funds at longer intervals.

This holds because when the investors access this funds frequently, they are moved by the constant fluctuation in the stock price, and they always tend to to get swayed away with profits or terrified by the loss so they are always judging their position based on the mark to market and taking decisions leading to tu frequent outflow of the money based on their current judgement which is highly influenced by their emotions.

When investors are frequently keeping a on look at their portfolios, they are highly affected by short term movement of their portfolio prices because they become exuberant looking at profits or highly despaired looking at their losses so they take short-term decisions based on their profits and it leads to fluctuations in assets under management of a hedge fund, because hedge funds generally take decisions based upon the long-term prospect of the market, and it generally do not consider the difference based on the short term events so arbitrageurs need to keep squaring off their position as their assets under management keeps on continuously fluctuating.