Window Dressing
http://online.wsj.com/home-page Thursday, December 6, 2012
Fund Managers Lift Results with Timely Trading Sprees
(“Window Dressing” – “marking the close” or “portfolio pumping,” is a form of “window dressing” – “employed by asset managers to make their results look better at the end of the quarter.” “But regulators say marking the close violates prohibitions on deceptive trading in the federal securities laws.”)
“A Wall Street Journal analysis of daily trading in roughly 10,000 stocks since 2004 found that on the final trading day of each quarter, there was a sharp increase in the number of stocks that beat the market by at least five percentage points, then trailed it by three points or more the next trading day.
Regulators and market analysts have an explanation for the unusual pattern. They say some money managers wait until the waning moments of the quarter to bid aggressively for more shares of a stock they already own, which drives up the value of their entire position in the stock. That, in turn, boosts their performance at the very moment when they report results, making their funds look more appealing to potential investors. Even if the jump in stock price is only temporary, the managers can attract new money and earn higher fees.
The practice, known as “marking the close” or “portfolio pumping,” is a form of “window dressing”—a term for a variety of techniques employed by asset managers to make their results look better at the end of the quarter. Some forms of window dressing, such as selling losing stocks right before reporting quarter-end holdings to investors, are perfectly legal. But regulators say marking the close violates prohibitions on deceptive trading in the federal securities laws.”
Source: WSJ analysis of stock prices S&P Capital IQ
“Iridex has a market value of $36 million, making it about one-twentieth the size of the average U.S. “micro-cap” small stock. The day before Iridex’s June pop, the stock had been down 22% for the quarter. Thanks to its last-minute surge, it closed the quarter down just 5.4%. Just like that, the company’s market value rose to more than $37 million, from less than $31 million the prior day. Almost all that nearly $7 million gain came in the last five minutes of June 29.
Since the beginning of last year, the SEC has brought at least three cases against money managers for allegedly window dressing stocks in their portfolios. SEC spokesman John Nester says window dressing is an area of “ongoing interest” in the agency’s investigations. Outgoing SEC chairman Mary Schapiro, speaking about securities fraud in general, said in an Oct. 11 speech that the regulator is “using newly developed analytics to identify suspicious trading patterns and relationships among multiple traders and across multiple securities.”
According to SEC filings and the managers, none of these firms have reported selling any Iridex shares since that day. James Mackaness, Iridex’s chief financial officer, said in an email that he is “not aware of anything” that could explain the jump in price on June.”
A stock jump on the final day of a measurement period can boost a money manager’s fees. Hedge funds typically collect annual fees equivalent to 2% of total assets and 20% of profits. Regulators and industry experts say a fund that already has a substantial holding in a small stock can drive up the value of its entire position by purchasing as few as 100 additional shares at a premium to their market price in the final moments of trading at the end of a measurement period. That can be enough to boost the entire fund’s performance for the month, quarter or year—potentially attracting performance-chasing investors.”
Source: WSJ
“Recent cases brought by regulators show the difficulties of documenting that the shadowy practice causes material damages to other investors.”
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