In most cases subscriptions and redemptions are netted off by the manager and the full subscription price is only applied to the net subscriptions. Remaining investors are not diluted but investors who get their timing right can buy at a discount and sell at a premium In a model where the full subscription price is applied to all inflows, even where these are used to fund redemptions rather than to acquire underlying assets, this results in a notional “premium” for the benefit of existing investors over and above the price required to ensure that they are not diluted, but also ensures that all investors suffer a round trip cost on subscribing and redeeming that reflects the cost of buying and selling the underlying assets.

A swinging price means that investors can make significant returns by buying units at the redemption price and selling them at the subscription price when the price swings. At the time of our report, there was a concern amongst those interviewed that this encourages short term arbitrage by some investors.

At the time of our report for AREF, there was a concern amongst those interviewed that this encourages short term arbitrage by some investors. On the face of it, this does not increase volatility since such investors are investing against the general flow of funds. However, it may encourage a short term attitude, although we did not identify any evidence of this in our work after the referendum.

At the time of our report for AREF, many intermediaries interviewed said that they have been reluctant to recommend investment in funds with two quoted prices (i.e. a fixed dual price model model) as they believe that this is confusing for retail investors. As a result, other fund managers have been reluctant to adopt this model due to the perceived lack of attractiveness to investors. Nevertheless, the fund mentioned in our report was successfully raising capital from those investors who believe that dual pricing is an appropriate model.