Experts Warn Of Conflicts Between Hedge Funds And Mutual Funds

by Carla Johnson, Investors Offshore.com

07 October 2003

Mutual fund companies which have launched their own hedge fund offerings in order to benefit from the increased interest in the loosely regulated investment vehicles may soon come under fire in the current regulatory climate, according to a Reuters report published at the weekend.

The news service explained that:

"Lawyers and investors alike long worried that conflicts would arise if managers at the same company run mutual funds, which buy and hold stocks, and hedge funds, which can bet against the future of a company by shorting the stock. They fear some clients will get better treatment because managers tend to earn much more money for running hedge funds than mutual funds."

It continued:

"Now, speculation that some mutual fund companies may have already violated their own rules by letting special clients engage in rapid-fire buying and selling of shares of the funds, or by illegally trading the shares after the stock market's 4pm close, is grist for skeptics who long thought the idea was a bad one."

The SEC recently released a report on the regulation of hedge funds, which followed (although was unrelated to) New York Attorney General, Eliot Spitzer's probe into market timing activity being undertaken by certain types of hedge fund.

In it, the regulator suggested that registration and closer oversight of hedge funds and their managers was necessary.

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