Our model of anomaly discovery has implications for both asset prices and arbitrageurs' trading. Consistent with existing evidence, the discovery of an anomaly reduces its magnitude. Our evidence based on 99 anomalies is consistent with new predictions that the discovery of an anomaly reduces the correlation between the returns its deciles 1 and 10, leading to diversification benefits for passive investors. These effects become linked to the aggregate trading of hedge funds only after discovery. Hedge funds increase (reverse) their positions in exploiting anomalies when their aggregate wealth increases (decreases), further suggesting that these discovery effects operate through arbitrage trading.