Sep. 10–New Jersey hedge fund Canary Capital Partners squeezed sweet returns out of mutual funds whose investors were drinking from a bitter cup.
Canary Capital averaged returns of more than 30 percent a year from 2000 to 2002 by trading quickly in and out of mutual funds, Canary disclosures say.
Costs related to those “timed” trades shaved returns from investors who in many cases already were suffering double-digit losses, alleges New York attorney general Eliot Spitzer, who is investigating the practice.
A Denver Post survey of eight of those timed funds, including Janus High-Yield and Janus Mercury, reveals losses averaged 17.4 percent a year from 2000 to 2002. That period coincides with the big market busts in technology and telecommunications shares.
However, in 2002, when the New Jersey hedge fund began timing Janus Mercury, Canary returned 15.24 percent. Janus Mercury investors, in contrast, had to swallow a 29 percent decline, the third consecutive year of 20 percent-plus losses they suffered.
“Mutual funds were the last bulwark in investor confidence,” said Kathryn Barland, senior research analyst at Lipper Inc. in Denver.
That confidence, already weakened by poor performance in the recent bear market, risks being shattered, she said.
Spitzer last week exposed deals Canary struck with Janus, Strong Capital, Bank of America and Bank One to time their mutual funds. Several other funds, including Invesco, have been asked to provide information.
“To the degree that you have many shareholders that aren’t doing this, you are allowing some to do better at the expense of others,” said Mike Stutzer, professor of finance and director of the Burridge Center for Securities Analysis and Valuation at the University of Colorado at Boulder Leeds School of Business.
Stanford professor Eric Zitzewitz, in a paper published in October, estimates market timers cost long-term investors as much as $5 billion a year.
Janus said Friday it would hire an outside expert to estimate how much damage timers had on the returns other investors received.
Under internal Janus guidelines, no more than 1 percent of assets could be moved, and a maximum of 12 “round trips,” or trades in and out of a fund, were allowed per year.
The existence of such rules implies Canary may be only the tip of the iceberg.
Janus has said market timers represented less than 0.5 percent of its assets under management. With about $150 billion in such assets, that works out to $750 million. That amount is not fully accounted for by Canary’s activity, meaning Janus likely had deals with other market timers.
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