Owing to an indemnity letter it provided to its U.S. broker, London-based hedge fund manager Headstart Asset Management may have to pay up for losses caused to U.S. mutual fund shareholders resulting from nearly $2 billion of market timing trades, according to Financial News.
William Galvin, secretary of the Commonwealth of Massachusetts, asked AG Edwards late last month to compensate shareholders for market timing trades but didn't name the two hedge funds that the brokerage allowed to time the funds. Now, Galvin alleges that Headstart made roughly 29,000 such trades through AG Edwards over two years beginning December 2001. But because Headstart agreed to cover any potential claims arising from such trading activities, AG Edwards may get by scot free while Headstart foots the bill.
Unlike other market-timing cases, where mutual fund companies have had to shell out millions of dollars in penalties and fines, this would be the first time a hedge fund would be legally obliged to pay a financial penalty for its actions.