Jan

15

Hedge Funds Market Timing Mutual Funds

January 15, 2004 | Leave a Comment

In a nutshell what occured here was extremely wealthy individuals fleecing the retirement accounts of average Americans. All with the help of various investment banks and a number of mutual funds themselves.   

You might be asking what the benefit is for mutual funds to allow these hedge funds to fleece them and its a good question. Mutual funds, like hedge funds, are run by management companies. The traders, sales people and staff are part of the management company that actually runs the mutual fund. The biggest revenue generator for mutual funds are management fees and those fees are based on the asset base of the mutual fund. So in return for allowing these hedge fund managers to market time their mutual funds, the mutual funds received “sticky assets” or a large sum of money parked at the mutual fund where they would collect fees. All these hedge fund managers did was find those mutual fund management companies that would allow this type of deal and there you have the market timing scandal and late trading scandal. They also found broker dealers who will skate hedge fund prospectuses and rules to allow these hedge fund managers to market time mutual funds.   

According to a study by the Stanford Graduate School of Business’ Eric Zitzewitz published late last year, U.S. mutual funds lose $4 billion a year because of market-timing, roughly double the levels from 1989 to 1999. He also said in the report that the solutions to market-timing problems that have been adopted by the fund industry have “serious shortcomings” despite the availability of effective and low-cost measures.    

“Short-term traders really affect the long-term performance of mutual funds,” says J. Alan Reid, president of San Francisco fund company Forward Funds. “The scary thing is it’s people’s retirement money and college savings that are paying for these market timers.”    Market timing unless specifically stated is not technically illegal.  Late trading of mutual funds = getting tomorrow’s price today or more specifically buying and selling mutual fund shares after market close and “events” is illegal.   

Hedge fund business is highly coveted in finance. Investment banks, attorneys, auditors and even the attorney general will do anything for these hedge fund managers due to their influence or more importantly their investor base and social circles. They share a social class that we are not privy to. Cocktail parties, country club memberships, charitable events and other elite social circles are where these people concoct these ideas and collude with one another to to fleece a system.   

I will provide more commentary in this area since it is very important for people to know who was involved in this as well as who is getting punished for it. With an attorney general seeking higher office, it is no surprise that the heads of hedge funds, mutual funds and investment banks are only being fined, while lower level associates are being hauled off to jail and charged criminally. Those with political influence get to walk away. Is this cronism or what?   

I will list all the politicians who have received money from people who are involved in this scandal. If politicians, whether they are democrat or republican, want to take money from people willing to fleece the middle class’ IRA accounts it is important to note it.   

You will be able to see how political contributions leads to immunity from the law. Fines being given to billionaires is more of a nuisance than a punishment. But once you look into political affiliations and other organizations that these individuals belong to, it becomes quite clear why they are only being fined.   

If ever there was a unique case study how people are immune from the law, this is it.   

Unfortunately I won’t be able to get the names of the investors in these hedge funds. But I will bet that they are also some of this nation’s most politically connected. Actually, I know for a fact that hedge fund investors constitute this nation’s elite class and ranges from heads of media, real estate tycoons, celebrities, attorneys and it’s basically a who’s who from around the world. One hedge fund in particular saw an increase in assets after being exposed for market timing mutual funds. In other words, telling the attorney general to “keeps his hands off our guy”. And as of yet, that particular hedge fund manager has not been fined or charged criminally and is still in business.   

I am not anti-hedge fund. I am neither democrat or republican so readers should not make any judgments based on political affiliations.    

Check back, I will be updating this area, the media is not going to touch these stories because it is too controversial. Why hasn’t anyone in the media asked why only lower level nobodies are being charged criminally? Why hasn’t the media asked who is receiving all the fines being handed out? Why isn’t the media asking what connections these managers AND their investors have with political parties? You have to be blind to think that Eliot Spitzer isn’t playing for donations and letting these folks off the hook for their political clout.    

The information below is not complete and should not be relied upon as fact. Gathering information about this scandal is more than difficult, alot of people are being protected, alot of names are missing from press releases, alot of hedge funds aren’t being named and lots of wheeling and dealing are going on behind the scenes making it hard to piece together this puzzle.   

So here is some advice for people working in the securities industry. If you are in your 20s and 30s and your boss brings in a hedge fund client and that client has concocted a scheme for easy money that is either borderline illegal or outright illegal, when it is all exposed, YOU will be the one who pays your career for it. So be careful, your boss and the hedge fund manager are only going to get fines and nothing more than that, you on the other hand will be barred from the securities industry and face fines or may even end up in jail.   

When I think of this mutual fund scandal I am reminded of “The Gangs of New York”, the part where Boss Tweed was getting complaints from citizens about crime at the five points and Boss Tweed’s answer for that was to ask William Cutting to hang a few people, “Hang 3 or 4 people with no political affiliations”, so that it looked like he was proactive against crime.


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