Limits to arbitrage is a theory in financial economics that, due to restrictions that are placed on funds that would ordinarily be used by rational traders to arbitrage away pricing inefficiencies, prices may remain in a non-equilibrium state for protracted periods of time.
The efficient-market hypothesis assumes that whenever mispricing of a publicly traded stock occurs, an opportunity for low-risk profit is created for rational traders.
The threat of this action on behalf of clients causes professional managers to be less vigilant to take advantage of these opportunities.
In perhaps the best known example, the American firm Long-Term Capital Management (LTCM) fell victim to limits-to-arbitrage, in 1998.
However, in the short run, due to the East Asian financial crisis and the Russian government's debt default, panicked investors traded against LTCM's position, and so the prices that had been expected to converge were, instead, driven further apart.