What happens when the same management groups runs two very different funds, one targeted to more sophisticated investors and the other to suckers ... um, retail customers?
What happens, to be more concise, if one group runs both a hedge fund and a mutual fund?
For many years there has been a widespread assumption that the danger in uch arrangements is this: the hedge fund will frontrun the mutual fund, taking advantage of its opportunties.
In 1993, Michael Barclay and Jerold Warner set out this theory in respectable academic form in an article in the JOURNAL OF FINANCIAL ECONOMICS. The gist of their hypothesis was that when these "concurrent managers" became aware of a really good profitable opportuntiy, they would trade in it first for the hedge fund account, because after all the fees they take from a hedge fund are very high and tied to profits. The mutual fund and its investors would get at best the left-overs from these opportunities.
Recent research, though, indicates the opposite is the case. Concurrent management is more likely to be biased AGAINST the hedge fund than in its favor. The empirical data is summarized in an article in the August 2009 issue of the Journal of Banking & Finance. How could this happen? Why bias your activity against the source of the larger set of fees?
The authors of that paper, Li-wen Chen and Fan Chen, hypothesize that concurrent management is often an effort to use in the hedge fund domain the "reputational capital" developed in the mutual fund domain. The mutual fund results are by far the more transparent, the more widely available, in any such case, so they work as advertising for both of the funds.
At the margin, then, the concurrent managers favor their mutual fund.
Showing posts with label mutual funds. Show all posts
Showing posts with label mutual funds. Show all posts
Wednesday, July 22, 2009
Tuesday, January 1, 2008
Eliot Spitzer and mutual funds
Spitzer, before his present term as Governor of New York began, was the state's Attorney General. This is an elective post in NY. He first won it in 1998, and won re-election easily in 2002.
He reconceived the role of that office, making himself the "sheriff of Wall Street." Probably two investigations stand out in that regard: one into market-time and late trading within mutual funds; one into the influence of investment banks upon market research.
As to mutual funds, it came to Spitzer's attention beginning in 2003 that certain managers of publicly traded mutual funds were allowing favored clients to engage in two practices that seemed to guarantee them (the favored) easy profits.
One of these practices was "late trading," i.e. the favored ones would file trades at the previous day's price after the market close. The other was "market timing," i.e. the purchase or sale of shares in the funds more frequently than allowed under the funds publicly published rules.
The cool thing about bringing actions against white-collar defendants (as another aspiring prosecutor/poltician, Rudy Giuliani, had discovered before Spitzer) is that there is no equivalent of the code of silence that often obtains among more hardened criminals. The public accusation, and the "perp walk" if matters go that far, is itself a devastating blow to most of Wall Street's denizens, and they'll often tell the enforcement authorities what they want to hear, or sign a consent decree, much more readily than their counter-parts.
The suspicion has gathered itself around both Spitzer's and Giuliani's handiwork, then, that they were picking off low-hanging fruit.
Nearly all of the mutual fund managements whom Spitzer charged with allowing market timing or late trading settled, so he didn't have to prove wrong-doing in court. He got his consent decrees, got fines, re-organized the industry under threat of continued vigilance, and took his bows.
The one instance in which someone did fight, interestingly, didn't go well for his office. in August of 2005 Spitzer the only trial arising from these investigations ended indecisively. A jury could not reach a verdict on all counts in a case brought against Theodore Sihpol, III, a broker with Bank of America who introduced the hedge fund Canary Capital to that bank.
Canary was the supposedly favored trader, indeed the first one targeted by Spitzer's investigations into this practice -- Sihpol its supposed puppet allowing the shenanigans.
After a hung jury, the state could of course have pressed for another trial. But both parties had had enough,so that in October 2005, the Mr. Sohpol settled a follow-up case that the SEC had brought in the wake of Spitzer's charges (agreeing to pay a $200,000 fine and accepting a five-year ban from the securities industry) and the state of New York withdrew all remaining charges against Mr. Sihpol.
The Washington Post, in reporting on the October resolution, quoted a former federal prosecutor, Evan T. Barr, who spoke for many when he said: "The resolution of the case on such favorable terms for the defense certainly calls into question whether Sihpol should have been indicted in the first place."
But Spitzer had had two years of favorable publicity by then and was well on his way to the Governor's office.
I think Mr. Sihpol has an almost heroic stature under the circumstances, and I look forward to his return to the fray in 2010.
He reconceived the role of that office, making himself the "sheriff of Wall Street." Probably two investigations stand out in that regard: one into market-time and late trading within mutual funds; one into the influence of investment banks upon market research.
As to mutual funds, it came to Spitzer's attention beginning in 2003 that certain managers of publicly traded mutual funds were allowing favored clients to engage in two practices that seemed to guarantee them (the favored) easy profits.
One of these practices was "late trading," i.e. the favored ones would file trades at the previous day's price after the market close. The other was "market timing," i.e. the purchase or sale of shares in the funds more frequently than allowed under the funds publicly published rules.
The cool thing about bringing actions against white-collar defendants (as another aspiring prosecutor/poltician, Rudy Giuliani, had discovered before Spitzer) is that there is no equivalent of the code of silence that often obtains among more hardened criminals. The public accusation, and the "perp walk" if matters go that far, is itself a devastating blow to most of Wall Street's denizens, and they'll often tell the enforcement authorities what they want to hear, or sign a consent decree, much more readily than their counter-parts.
The suspicion has gathered itself around both Spitzer's and Giuliani's handiwork, then, that they were picking off low-hanging fruit.
Nearly all of the mutual fund managements whom Spitzer charged with allowing market timing or late trading settled, so he didn't have to prove wrong-doing in court. He got his consent decrees, got fines, re-organized the industry under threat of continued vigilance, and took his bows.
The one instance in which someone did fight, interestingly, didn't go well for his office. in August of 2005 Spitzer the only trial arising from these investigations ended indecisively. A jury could not reach a verdict on all counts in a case brought against Theodore Sihpol, III, a broker with Bank of America who introduced the hedge fund Canary Capital to that bank.
Canary was the supposedly favored trader, indeed the first one targeted by Spitzer's investigations into this practice -- Sihpol its supposed puppet allowing the shenanigans.
After a hung jury, the state could of course have pressed for another trial. But both parties had had enough,so that in October 2005, the Mr. Sohpol settled a follow-up case that the SEC had brought in the wake of Spitzer's charges (agreeing to pay a $200,000 fine and accepting a five-year ban from the securities industry) and the state of New York withdrew all remaining charges against Mr. Sihpol.
The Washington Post, in reporting on the October resolution, quoted a former federal prosecutor, Evan T. Barr, who spoke for many when he said: "The resolution of the case on such favorable terms for the defense certainly calls into question whether Sihpol should have been indicted in the first place."
But Spitzer had had two years of favorable publicity by then and was well on his way to the Governor's office.
I think Mr. Sihpol has an almost heroic stature under the circumstances, and I look forward to his return to the fray in 2010.
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