54 The Journal of Finance the strategies being used and judge arbitrageurs relative to a more accurate benchmark of their peers(e.g.,other value managers or a value index),thereby diminishing some of the withdrawals when an entire peer group is performing poorly.The specialized arbitrage approach is clearly more appropriate for difficult-to-understand new arbitrage opportunities than it is for well-under- stood anomalies (which should presumably not be anomalies for long). We would nonetheless argue that anomalies become understood very slowly and that investors do not take definitive action on their information until long after a phenomenon has been exposed to public scrutiny.The anomaly is more easily accepted when the pattern of returns is not very noisy and the payoff horizon is short (such as the small firm effect in January).A "noisy"anomaly like the value-glamour anomaly is accepted only slowly,even by relatively sophisticated investors. V.Conclusion Our article describes the workings of markets in which specialized arbitra- geurs invest the capital of outside investors,and where investors use arbitra- geurs'performance to ascertain their ability to invest profitably.We show that such specialized performance-based arbitrage may not be fully effective in bringing security prices to fundamental values,especially in extreme circum- stances.More generally,specialized,professional arbitrageurs may avoid ex- tremely volatile"arbitrage"positions.Although such positions offer attractive average returns,the volatility also exposes arbitrageurs to risk of losses and the need to liquidate the portfolio under pressure from the investors in the fund.The avoidance of volatility by arbitrageurs also suggests a different approach to understanding persistent excess returns in security prices.Spe- cifically,we expect anomalies to reflect not some exposure of securities to difficult-to-measure macroeconomic risks,but rather,high idiosyncratic re- turn volatility of arbitrage trades needed to eliminate the anomalies.In sum, this more realistic view of arbitrage can shed light on a variety of observations in securities markets that are difficult to understand in more conventional models. REFERENCES Allen,Franklin,1990,The market for information and the origin of financial intermediation, Journal of Financial Intermediation 1,3-30. Allen,Franklin,and Gary Gorton,1993,Churning bubbles,Review of Economic Studies 60, 813-836. Bhattacharya,Sudipto,and Paul Pfleiderer,1985,Delegated portfolio management,Journal of Economic Theory 36,1-25. Campbell,John,and Albert Kyle,1993,Smart money,noise trading,and stock price behavior, Review of Economic Studies 60,1-34. Chevalier,Judith,and Glenn Ellison,1995,Risk taking by mutual funds as a response to incentives,manuscript. DeLong,J.Bradford,Andrei Shleifer,Lawrence Summers,and Robert Waldmann,1990,Noise trader risk in financial markets,Journal of Political Economy 98,703-738