Fair-Value Pricing and the End of Fund Timing

Mutual funds that invest internationally traditionally priced their shares each day using the last traded price of each foreign holding — but foreign markets close many hours before the US fund calculates its net asset value (NAV). If US markets rallied strongly during the day after Asian markets had already closed, a fund's stale, unchanged Asian holdings prices would understate what those holdings were actually worth by the time the US NAV was struck, because they'd almost certainly open higher the next day in sympathy with the US move.

This created a well-known "fund timing" arbitrage: buy fund shares late in the US trading day whenever a large US market move signaled that the fund's foreign holdings were stale-priced too low, then redeem the next day once the NAV caught up to reflect the overnight foreign gain — a nearly risk-free trade funded by diluting the fund's existing long-term shareholders, since the arbitrageur captured a gain the price staleness hadn't yet reflected.

Regulators closed this loophole by requiring fair-value pricing: instead of the stale last trade, funds must estimate what an illiquid or foreign holding would actually be worth at the moment of NAV calculation, typically using a model that adjusts the stale foreign closing price for the correlated move in a liquid proxy (like US futures) that traded after the foreign market closed. This removes the predictable staleness gap that the timing arbitrage relied on, and combined with redemption fees and stricter trading limits, largely ended the practice after it came under regulatory scrutiny in the mid-2000s.