Kansas Denies Ex-Waddell Chief $1.2M Tax Refund

A judge has ruled that Keith Tucker, the former chief executive officer of Waddell & Reed, was, indeed, a resident of Kansas City between 1999 and 2003, not Texas, and, Kansas, that he must pay $1.2 million in taxes, penalties and interest. Jackson County Circuit Court Judge John M. Torrence made the ruling, The Kansas City Star reports.

Kansas City charges residents a 1% earnings tax. "This is good for the city," said City Manager Warne Cauthen. "The decision is a complete victory for the Revenue Division," said City Attorney Galen Beaufort.

Meanwhile, Tucker still has an unresolved matter with the Internal Revenue Service, which claims that he and his wife improperly deducted $39.2 million from their income and owe the government $22 million in taxes and penalties.

San Diego Pension Fund Suing Amaranth Advisors

Amaranth Advisors, the largest hedge fund in history to collapse, is facing its first investor lawsuit, from the San Diego County Employees Retirement Association (SDCERA), Reuters reports.

The lawsuit claims that Amaranth's investing strategy violated its contract that stipulated its portfolio would be diversified and adhere to proper risk controls.

The lawsuit is no surprise to hedge fund experts who have long expected some legal action to be taken against the defunct hedge fund. Amaranth wrote a letter to investors in February proposing speedier redemptions of its remaining assets to investors who agreed not to sue.

Amaranth criticized the litigation, stating it would increase its legal costs and thereby reduce recovery for investors as it winds down its assets and returns cash to investors. The hedge fund stated it has hired top attorneys David Boies of Boies, Schiller & Flexner and Dan Webb of Winston & Strawn to defend against the litigation.

"Everybody except SDCERA seems to get the point that there is nothing to be gained from litigation," said Boies in a statement. "We are disappointed that SDCERA has chosen to undertake meritless litigation that will inevitably reduce its own recovery and potentially the recovery of other investors."

"Amaranth told us that a team of highly experienced professionals would carefully manage our pension funds," said SDCERA Chairman David Myers in a statement. "Instead, they turned our money over to [trader] Brian Hunter, who in my opinion was a rookie trader."

China's Forex Regulator Warns of Online Fraud

A number of illegal funds that purport to deliver high returns in foreign investments are soliciting assets from Chinese investors, China Daily reports. One such fund, the Switzerland Mutual Fund, promises a 300% return within 450 days and has raised $12.9 million since it launched late last year.

As a result, China's foreign exchange regulator, the State Administration of Foreign Exchange, is warning investors against the scams.

The funds operate like pyramid schemes, the regulator said, and once money stops flowing into the funds, the remaining investors will be badly hurt.

Alliance Ordered to Pay Former Salesman $3.1M

An NASD arbitration panel has ordered AllianceBernstein to pay a former top salesman $3.1 million, upholding his lawsuit against the firm for having been fired for his part in the firm's mutual fund timing scandal, The Wall Street Journal reports. Charles Schaffran, the salesman, said the company defamed him.

The reward includes $2.7 million for defamation and $400,000 in back pay, and is one of the largest NASD has ever granted.

Schaffran said he had raised questions about market timing by hedge fund clients to upper management, which sanctioned the activity. Schaffran also argued that he didn't engage in the "conflicts of interest" that Alliance had charged him with since his only clients were hedge funds, and not mutual fund shareholders.

"The arbitrators' verdict confirms that, contrary to Alliance's defamatory public pronouncements, I never had a conflict of interest and at all times acted in accordance with my obligations to Alliance investors," Schaffran said.

No More Pension Plan for Fidelity Investments

Fidelity Investments is going to close down its pension plan and enhance its 401(k) by raising company matches from 5% to 7%, the Associated Press reports. The company is also going to offer employees a health-savings credit they can use in retirement. Those who have existing pension benefits will be given the choice of rolling them into a profit-sharing plan or accepting them as annuities at retirement.

The company decided to offer the healthcare benefit after an internal survey showed that 71% were concerned about medical costs in retirement.

Today, only a third of Fortune 100 companies still have pensions, down from 50% in 2002 and 89% in 1985, according to Watson Wyatt Worldwide.

Hedge Funds Assets Rise 30% to $2T Worldwide

Although hedge funds didn't deliver stellar returns in 2006, many of them trailing major stock indexes, their assets rose 30% to $2 trillion worldwide, Bloomberg reports, citing a report from HedgeFund Intelligence. Last year, the average hedge fund returned 13%, compared to the S&P 500 Index's 16% return and the MSCI World Index's 21% gain.

The fastest-growing hedge fund market is in Europe, with its hedge fund assets rising 41.5% in 2006 to $260 billion, according to the report. More than 350 managers have assets of $1 billion or more, collectively controlling $1.6 trillion. Half of them are in the U.S., 105 in Europe and 35 in Asia.

ETFs Edge Toward Active, Quant-Based Management

While exchange-traded funds have yet to offer an actively managed variety, they are creeping in that direction through elaborate indexes, many of them based on quantitative models, according to Morningstar. These quantitative funds use computer models to screen for stocks based on such set criteria as valuation, strength and momentum. PowerShares offers the most of such quasi-active funds: 36.

One problem with such funds, however, is that if they are delivering strong performance, others will try and replicate their strategy, making it harder to achieve. But that can be overcome by constant tweaking of the computer model, Morningstar maintains.

They also tend to have high stock turnover, and, thus, high operational costs and lower tax efficiencies than other ETFs.

Finally, firms that run quantitative models tend to keep their criteria close to the vest, making it difficult for investors to evaluate their offerings.

Schwab Launches Three Fundamental Index Funds

Charles Schwab has launched three index mutual funds based on fundamentally weighted, rather than market cap-weighted, indexes. They are the Schwab Fundamental U.S. Large Company Index Fund, the Schwab Fundamental U.S. Small-Mid Company Index Fund and the Schwab Fundamental International Large Company Fund.

The funds weight stocks based on four fundamental financial measures: sales, cash flow, book value and dividends.

"The fundamental index methodology is the most important innovation in passive investing since indexing was popularized in the 1970s," said Charles R. Schwab, chairman and chief executive officer of Charles Schwab. "Investors who need broad exposure to markets and diversification within their portfolios at a low cost are going to appreciate this new investment tool and its potential to capture greater return with lower volatility. I think we'll look back at this innovation as a watershed moment for the mutual fund investor and for the $5 trillion index fund industry."

European Mutual Funds Seek Permission to Use Hedge Fund Derivatives

European mutual fund executives have told the Committee of European Securities Regulators that indexes linked to hedge funds' performance are becoming more commonplace in the investment management industry and that they should be allowed to invest in derivatives linked to such indexes, the International Herald Tribune reports. Last month, the committee indicated it was considering passing such a measure.

"It's an increasingly safe way to access the hedge fund market," said Caelim Parkes, who is in charge of marketing for Europe, the Middle East and Africa for MSS Capital and runs the FTSE Hedge Index. "The retail market is a hugely untapped area in terms of hedge funds' assets raising.

Highfliers of 2000 Offer Sober Lesson on Returns

In March 2000, there were 275 funds delivering returns of 100% or more in the previous year. Twenty four of them rose 200% or more, and the PBHG New Opportunities Fund skyrocketed a staggering 533%.

The Wall Street Journal took a look at the funds today and found that 35% of them, or 97, no longer exist; 44 were merged into other funds, 22 were liquidated and 31 disappeared from Morningstar's database.

Of the 179 that still exist, only 20% have surpassed the market's average annual gain of 1.7% since 2000.

"The worst were those funds that were pedal to the metal and were paying little attention to the downside," noted Christine Benz, director of mutual fund analysis at Morningstar. "Funds that held up relatively better have been run by fund managers that pay attention to risk control."

Others that have done well have invested in overseas markets, particularly emerging markets.

Fund Choices Overwhelm Older Investors: AARP

Investors age 50 and above are overwhelmed by mutual fund choices, frustrated by complicated prospectuses and unsure of where to turn for advice.

These were some of the key findings from a survey of investors in the Phoenix area by AARP Financial.

"Investing for retirement is unnecessarily complex, confusing and time-consuming," said Richard M. Hisey, chief investment officer at AARP Financial. "As a result, many investors save too little, too late or too sporadically, while others stop saving altogether."

Thirty-eight percent of the 176 people surveyed have $100,000 or less saved for retirement. Fifty-eight percent said they believe investing is too complicated for the average person, and 63% said they are overwhelmed by investment options.

More than three-quarters said prescription drug information, car insurance policies and DVD instructions are easier to understand than fund prospectuses; as a result, only 11% said they read the entire prospectus.

"Too much choice can stymie investors," Hisey added. "In fact, research suggests the fewer investment options available in a retirement savings plan, the higher the participation rate."

In addition, 45% said they were "unaware" or "not sure" of the fees they pay for mutual funds.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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