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The prices of closed‐end funds present a puzzle for market efficiency. The chief feature of the puzzle is that closed‐end fund prices systematically deviate from fundamental values. In this respect, fundamental value is measured by net asset value (NAV), defined as the per share market value of the securities in the closed‐end fund portfolio. Because fund shares trade on organized exchanges, just like the shares of corporations, the market value of the closed‐end fund shares may differ from NAV. When the market value of closed‐end fund shares exceeds NAV, the shares are said to trade at a premium. If market value is less, the shares trade at a discount. Typically closed‐end funds begin trading at a premium, but within a few months begin to trade persistently at a discount. The closed‐end puzzle illustrates opaque framing, heuristic‐driven bias, and an inefficient market—in short, all three themes in behavioral finance.

As this chapter explains, the formula for remunerating investment advisers is a simple but powerful one. The revenues an adviser earns each year are equal to the adviser’s fees multiplied by the assets under management. If the professionals who work for investment advisers are like other corporate executives, then they are ever eager to maximize their revenues. Under this compensation formula, they have just two options for doing so either increase their fees or increase their funds’ assets. How might an adviser—granted, only one liberated from its scruples—attempt to manipulate our compensation formula to its illicit advantage? Simply by overstating the amount of assets under its management. If the value of the securities in a fund’s portfolio was reported to be greater than it actually is, then the assets under management would be higher, and the adviser would thereby earn greater revenues.

Some of mutual funds' success is attributable to external factors, including generally strong securities markets, a growing middle class, and laws encouraging Americans to save for retirement. These factors have benefitted all types of investment vehicles. Mutual funds' unique success has been due to their unique characteristics (daily redeemability and sales at current net asset value, required diversification, and limits on leverage); the requirements of the Investment Company Act; firm SEC regulation; and a fiduciary culture. The industry's future will depend on continuation of that culture.

Simultaneously with the private equity (PE) boom of the 1990s, the sub-segment of publicly traded firms that buy and sell private companies expanded almost as quickly as the entire asset class. Listed publicly traded PE mirrors the structures of conventional non-listed PE but offers added advantages to investors. This chapter first describes organizational forms and legal structures of publicly traded vehicles and then analyzes their risk profiles and pricing characteristics. Systematic risk of listed vehicles can be substantial while being highly diverse across internally and externally managed entities. Empirical research uses market prices of traded PE funds to estimate the pricing relationship between net asset values (NAVs) and share prices. Evidence suggests that NAV discounts mainly depend on liquidity, fund type, and investor sentiment.

Prime money market mutual funds (MMF) are particularly susceptible to runs given the inherently short-term nature of their liabilities and the riskiness of their assets as compared with government funds. Thus, it is a proper object of policy to minimize the possibility of prime money market fund runs. This chapter discusses the SEC's approach to MMF reform. The approach incorporates three elements: (1) enhanced liquidity requirements; (2) a floating net asset value (NAV) requirement for certain classes of money market funds; and (3) the possibility of imposing liquidity fees and redemption gates on money market funds, which would limit rapid MMF creditor outflows in times of stress. It specifically rejected imposing a capital requirement on these funds. At the outset it should be clear that the concern with contagion should only be with prime money market funds and municipal funds, and not with government funds, which are all but immune from runs.

Mutual funds, which are open-end funds (OEFs), remain the mainstay of the portfolio investment vehicles serving “mass affluent” investors in the United States. This chapter provides an overview of the key features of mutual funds such as daily liquidity at the net asset value (NAV) with the fund itself as the counterparty to the trade, active management, and fund family structure. The chapter then proceeds to examine the current issues facing mutual funds. These issues include the daily computation of the NAV, performance assessment in terms of time and dollar weighting, and the competitive environment for mutual funds both inside and outside of retirement plans. This overview chapter concludes with some predictions about the future of mutual funds and calls for research of interest to both academics and practitioners.

Premiums and discounts in ETFs are a persistent source of questions from policymakers and practitioners because there is no such analogue for an open-ended mutual fund. Specifically, why do ETFs trade at premiums or discounts, and how does this affect tracking error? Why are ETF returns sometimes much more volatile than the volatility of returns of their underlying indexes? How does ETF pricing and liquidity work in times of market stress? Do large premiums/discounts at these times reflect pricing errors? Are these persistent and if so, is this an arbitrage opportunity? How should investors incorporate deviations from net asset value (NAV) into their investment decisions? Should they avoid buying funds trading at steep premiums or selling funds at a significant discount? This chapter develops a framework to analyze these questions.