November 2003
Hedge fund dodges mutual fund fallout
Hedge fund Aquila Capital Partners' founder Neal Berger makes no bones about his obligation to be quick-witted in exploiting new market inefficiencies as soon as they arise. If this means holding on only to employees that are equally adaptable, that's all part of his own survivor's mentality.
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Neil Berger, founder of Aquila Capital Partners
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IT WAS BECOMING such a popular trading strategy that in July Neal Berger decided to set up a separate fund dedicated to it. It was a significant departure for the president and founder of Aquila Capital Partners. He had started his hedge fund in 2000 as a multi-strategy fund. Now, though, more clients were clamouring for direct, exclusive exposure to a strategy called mutual-fund timing, and it was becoming difficult to say no, especially when Aquila was still trying to attract assets. "We set up the separate fund, Aquila Partners, quite simply because investors wanted more exposure to the strategy because it brought in such juicy returns," says Berger.
There was one problem. Berger set up the stand-alone fund just weeks before New York state attorney general Eliot Spitzer started to send subpoenas to some of the players involved in mutual-fund timing. Spitzer was investigating the illegal practice of late trading whereby, for example, a trader buys a mutual fund stock after the market closes at 4pm because later events lead him to believe that the stock will rise the following day. Using a cosy arrangement with a broker, and possibly the mutual fund as well, he gets the 4pm price and, assuming the stock performs as he believes the following day, makes a quick killing. Spitzer's investigations led to charges against a hedge fund, Canary Capital Partners, which reached a $40 million settlement with Spitzer. He also investigated mutual funds at Bank of America, Bank One, Janus Capital Group and Strong Capital Management. Several executives from the first two of these firms have since been fired or have left.
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