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Friday, August 25, 2006

Small Time Timers Were Funds Biggest Leeches

by: Sean Hanna, Editor in Chief

The Wall Street Journal's Fund Track column picks up on something that fund executives have known for more than a decade -- it was not just hedge funds that market-timed mutual funds. In fact, much of the trading was done by the little guy. For the wider world, however, the news comes as a "new wrinkle" on the fund trading scandals.

The paper's report is based on data collected from Columbia Funds by Lawrence Hamermesh, a professor of corporate and business law at Widener University School of Law, as part of Bank of America's settlement with the SEC. That data, which can be found here, showed that market timers cost the funds as much as $150 million in profits from 1998 to 2003. More than $100 million of the money siphoned by the funds by market timers was the result of trades made by small investors in retail and 401(k) accounts. In contrast, the nine hedge funds that cut market timing deals with Columbia drained only $30 million in assets, according to the research.

Trustees of the fund seem unsurprised by the finding that individuals were able to take advantage of market-timing strategies.

"What you see is the marketplace at work," Thomas Theobald, an independent trustee for the funds told the paper. He added that "in my opinion, it's inconceivable that this sort of thing can happen again."

The report also acknowledges earlier research by Eric Zitzewitz, an assistant professor of economics at Stanford Graduate School of Business, who used fund flows and return data obtained from third-party research firms to estimate that up to 90 percent of fund families were the targets of market timers in 2001. 

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