After Eliot Spitzer discovered the fund market-timing scandals in 2003, regulators searched for a solution. One approach proposed by the SEC was to boost redemption fees, socking speculators with extra costs for their short-term trades. But, lately, fee proponents have been losing their enthusiasm. The SEC decided not to make the fees mandatory. Companies, such as Putnam and SSgA, have announced that they will cut fees or eliminate them entirely.
“Firms are moving away from redemption fees,” says Cindy Zarker, a senior analyst with Cerulli Associates, a consulting firm in Boston. “That’s good news for advisors who find it frustrating to deal with all the extra charges.”
Redemption fees have less support partly because market timing has virtually vanished. Now that companies have increased monitoring efforts, speculators have stopped trying to trade rapidly. The extra policing has been particularly effective at stopping questionable trading of Asian funds. In pre-Spitzer days, a popular strategy for a New York-based speculator was to buy an Asian fund during an afternoon when the S&P 500 was rising. The speculator paid the fund closing price, which is typically set every day at 4 p.m. Eastern time. Since that hour is 4 a.m. in Hong Kong, Asian investors have not yet had time to catch New York’s fever. Prices of Asian stocks were then considered “stale.” Speculators could buy in New York, hoping that Asian prices would rise the next day.
By buying stale portfolios, a New York speculator might make a percentage point a day, good money if you can buy and sell a fund several times a week. But now that such constant trading has been barred, the old tactic produces little if any rewards.
Besides using increased monitoring, Guinness Atkinson Funds has found another strategy for stopping the Asian arbitrage. Instead of pricing the company’s Asian funds at 4 p.m., as nearly all companies do, Guinness sets daily fund prices at 12:30 a.m. Eastern (half an hour after midnight), a time when Hong Kong markets are open. “We want to give shareholders real prices, not stale ones,” says Jim Atkinson, chief executive of Guinness Atkinson.
