We conduct a spectral analysis of the relation between capital flows and mispricing. Hedge funds and mutual funds both behave as low-pass filters, deploying high-frequency flows towards lowfrequency mispricing. But hedge funds attenuate high-frequency flows more than mutual funds do, thus improving market efficiency 2 to 7 times more slowly than mutual funds worsen it. Timeseries and cross-sectional tests indicate that risk, limited access to capital, and implementation costs are the reasons hedge funds behave as low-pass filters. Our results highlight the differential effect of arbitrage capital on market efficiency across frequencies.

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