A desire for profits in a turbulent time for the market helped push mutual fund managers enough that they started allowing frequent market timing by clients, New York Times columnist Gretchen Morgenson writes.
Although some market timing was allowed in the early 1990s, it was usually in small doses and usually by a few institutional firms. But the end of market nirvana in 2000 touched off a huge jump in the practice, with hedge funds taking advantage most often.
Even though their companies had policies against the quick in-and-out trades, a loss in assets under management and the corresponding drop in management fees made it too tempting to say no to market timing.
"Profits to the fund companies seemed to take precedent," said analyst Phil Edwards of Standard and Poors. The recent surge in market timing isnt exactly new, though. In the pre-securities law days of the 1920s, investors would trade in and out of funds when they noticed that the price of the entire package and the sum of all a funds actual stock prices differed. But after the crash in 1929, reports circulated about those trades, and the Investment Company Act of 1940 addressed the problem. With the recent hearings on Capitol Hill and suggestions and demands by the Securities and Exchange Commission, it seems like history is repeating itself.