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Fund Spy

What the Front-Running Investigation Means for Fund Investors

Did hedge funds get tipped to fund trades?

Before the investigation into market-timing became public, fund companies were under siege from market-timers looking for a back door that would let them do market-timing, time-zone arbitrage, and even late trading. However, once Eliot Spitzer held his press conference back in September 2003, timing dried up quickly.

Suddenly, timing wasn't just something that hurt fund investors. It was a threat to fund company executives' careers and even freedom, and it was also a threat for the hedge funds and others who had been offering bribes to get away with timing and late trading. The net result was a big benefit for fundholders, as they are now pretty well-protected from timing, which reduces fund returns for long-term shareholders.

Now, the SEC is apparently launching a new probe, and it's my hope that it will benefit fundholders just as much as the timing probe did. According to The New York Times, the SEC is investigating whether brokers are tipping off hedge funds and others about big mutual fund trades so that they can profit from those trades.

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