The Financial Services Authority is investigating the UK fund management industry for controversial dealing activities that take advantage of time differences across world markets to the detriment of long-term investors.
The activities are rife in the United States mutual fund industry. The Securities and Exchange Commission revealed yesterday that a quarter of US firms are guilty of late trading. These funds are priced only once a day at 4pm, but trades have been taking place after this deadline at the previous day's price.
Now it appears UK fund managers are being targeted by hedge funds wanting to capitalise on the time lag between daily prices in international funds in a process known as "market-timing". Hedge funds watching the world markets can buy into a fund at the day's given price in the knowledge that it will rise when markets elsewhere in the world close or open. They then sell when the fund is repriced, which dilutes value for long-term investors.
Standard Life Investments, who rebuffed the business of one hedge fund trading in and out of its fund, was offered higher fees to turn a blind eye.
"The practice is not uncommon but it is not a huge problem," Alan Burton of Standard Life Investments said yesterday. "We are very wary of it. It is immoral to accept larger fees to trade against the interests of your remaining unit holders."
To assess the extent of market timing in the UK, the FSA sent out a questionnaire to fund managers. The practice is not illegal, but the regulator wants to assess if long-term investors are losing out. The deadline for responses was Friday.
Fund managers in the UK, however, do not believe that the practice is widespread.
"It works well in the US because most world indices tend to follow what has happened there. It is easier for a hedge fund to guess whether the market will open at a higher price in Japan, for example, than the close price in the US," Jeremy Soutter, of Morley Fund Management, said yesterday.Reuse content