Net Asset Value Arbitrage

Net asset value arbitrage

For a number of assets, the most recent transaction price at 4PM ET does not fully reflect all available market information. One example is international equities that trade on exchanges that are located in different time zones and close 2-15 hours before U.S. markets. In addition, domestic small-capitization equities and high-yield and convertible bonds often trade infrequently and have wide bid-ask spreads. This can cause the most recent transaction price to be much different from the price that one would see in a liquid market at 4 PM, even for assets that trade on exchanges that are open at that time. Investors can take advantage of mutual funds that calculate their NAVs using stale closing prices by trading based on recent market movements. For example, if the U.S. market has risen since the close of overseas equity markets, investors can expect that overseas markets will open higher the following morning. Investors can buy a fund with a stale-price NAV for less than its current value, and they can likewise sell a fund for more than its current value on a day that the U.S. market has fallen. Similar opportunities exist when the values of infrequently or illiquidly-traded domestic assets have recently changed. Also known as Stale Price Arbitrage.

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Net Asset Value Arbitrage

An investment strategy in which one takes advantage of a discrepancy in the net asset value between a mutual fund trading on two different exchanges. The net asset value of a mutual fund is calculated at the end of a trading day. However, because of differences in time zones, different exchanges close at different times. Thus, one example of NAV arbitrage involves buying a mutual fund in after-hours trading on one exchange on which the NAV has been set for the day at a certain price, and then selling it on an exchange that is still open and on which the same fund's NAV has not been set and is trading at a higher price. It is also called stale price arbitrage.