For years, mutual fund managers have coped with sudden inflows of cash followed by abrupt redemptions, the result of market timers attempting to take advantage of short-term variances between a fund's daily NAV price and the prices of the underlying securities. While some fund companies are intentionally designed to facilitate market timing, most mutual fund firms seek to meet the needs of long-term investors. Volatile flows caused by short-term trading can diminish annual fund returns by more than a percentage point.
Many fund companies have tried to discourage market timing with redemption fees and other measures. Identifying and tracking short-term traders, however, can be a cumbersome, time-consuming process. Recognizing the challenges created by market timers, PFPC is now offering fund companies the ability to accurately identify short-term traders and impose fees and other penalties, including restrictions on trading by certain individuals or firms.