Question
I need Help on this case Edward Stern at Canary Capital Partners LLC, a hedge fund, oversaw a partnership with as many as 30 mutual
I need Help on this case
Edward Stern at Canary Capital Partners LLC, a hedge fund, oversaw a partnership
with as many as 30 mutual fund companiesincluding Bank of America, Security
Trust Company, Bank One, Janus Capital, and Strong Capital Managementto
engage in late trading and market timing.
Mutual funds are priced once daily at 4:00 p.m. EST after markets close. This
price, known as the net asset value (NAV), will be the funds price the following
day. Allowing some investors to transact after hours, but before the new NAV is
determined, is known as late trading. Investors can purchase (or sell) at the stale
price, knowing that the following day the NAV will be higher (or lower) and thereby
guarantee a profit. Market timing occurs when investors are allowed to transact
during the day at the prior days NAV, thus taking advantage of information that will
change the new NAV after the close.
Some mutual funds do not have enough time during the day to fulfill all their
trade requests, so they fulfill these trade requests after hours.
The mutual funds permitted Canarys trading practices as long as Canary kept
other assets with the investment management portion of the mutual fund firms.
Canary kept millions of dollars of assets invested with the funds and also generated
substantial brokerage commissions through trading.
After reading Case, discuss the negative consequences of late trading and market timing. Why would Canary Partners pursue these investment practices? What ethical reasons might allow the use of such investment strategies?
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