Federated Investors Inc., one of the largest US mutual fund firms with USD 202 billion in assets, has named two hedge fund firms which engaged in marketing timing practices.
In a detailed accounting of improper share trading released this week, the mutual fund firm said late trades were accepted by Federated employees on 15 occasions from Veras Investment Partners, a Sugar Land, Texas-based hedge fund adviser.
Federated also disclosed it had permitted an arrangement to allow another hedge fund, Canary Capital Partners LLC, to engage in market timing of Federated's domestic equity funds. Canary was at the centre of the initial investigation into improper mutual fund share trading revealed in September by New York Attorney General Eliot Spitzer.
According to Federated, Canary was introduced by an unnamed "national brokerage firm" client. Federated said it permitted Canary to trade in six of its domestic equity mutual funds, including Federated Kaufman Fund. As part of the arrangement, Canary made a long-term investment of USD 10 million into a Federated short-term bond fund.
Federated said it agreed to permit Canary to engage in timing "as long as the trading was limited in frequency and scope." Between 22 January and 2 July 2003, Canary made 46 rapid-fire trades in the Federated equity funds, according to Federated.
In addition, Federated made two other arrangements with other outside firms to allow timing in high-yield bond funds.
Federated President Christopher Donahue said in a letter to clients that the firm is continuing to cooperate with authorities and is "committed to taking remedial actions when and as appropriate", including compensating the stock funds for any damages arising from the market timing trades.
copyright hedgeweek 2003