NEW YORK (AP) – Investors fled hedge funds accused of shady trading practices in droves last year as their strategies came under intense scrutiny from regulators, according to a survey.
The funds saw $1.8 billion, or nearly half of their total assets, walk out the door in 2003, according to Hedge Fund Research Inc. of Chicago.
The outflows began in the fourth quarter, after New York Attorney General Eliot Spitzer charged New Jersey hedge fund Canary Capital Partners LLC with market timing and late trading at four mutual-fund families in early September.
Canary principal Edward Stern agreed to a $40 million settlement without either admitting or denying the allegations.
Investors pulled a net $3.04 billion from allegedly market-timing hedge funds from October through December, more than offsetting the $1.25 billion of new money these funds took in during the first three quarters of the year.
The probe has since expanded to encompass a number of large hedge funds as well as investment professionals and senior executives at several leading mutual-fund companies, attracting the attention of securities regulators in Washington, Massachusetts and New Hampshire.
Market timing is the practice of buying and selling mutual fund shares rapidly in order to profit from inefficient pricing of their underlying portfolios.
In late trading, traders obtaining same-day prices for mutual funds after the 4 p.m. cutoff.
HFR President Joshua Rosenberg said the strength of the hedge-fund outflows suggests investors are concerned that other market-timing hedge funds will come under regulatory scrutiny, or at least find it more difficult to run their investment strategy. “There’s not a huge tolerance of that kind of risk in the hedge-fund world,” he said.
The average market-timing hedge fund tracked by HFR returned 15 percent in 2003. While those results fell short of those of several other hedge-fund strategies, “it was super-easy money,” Rosenberg said.
The heavy withdrawals from market-timing hedge funds were in sharp contrast with the broader hedge-fund industry, which took in a net $75 billion of new money last year, according to HFR.
HFR estimates that total hedge-fund assets grew 31 percent to a record $817 billion in 2003, reflecting a combination of market appreciation and net inflows.
