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research Some Hedge Funds Fudge the Numbers 2000 to 2010, four researchers have discovered that some hedge fund managers may manipulate the prices of stocks they hold in order to have better returns to report to investors. These researchers include Itzhak Ben-David of Ohio State University's Fisher College of Business in the U.S., Francesco Franzoni of the University of Lugano and the Swiss Institute in Switzerland, Augustine Landier of the Toulouse School of Economics in France, and Rabih Moussawi of the Wharton School of the University of Pennsylvania in the U.S. The researchers found an increase in trading activity among some hedge funds on the last day of the month and quarter, which artificially inflates their returns. Specifically, stocks most often held by hedge funds see an average abnormal return of 0.30 percent on the last day of trading. About half of that increase comes in the last 20 minutes of trading. Those returns disappear in the first ten minutes of trading the next day, but only after the hedge funds can report them to investors. The practice is called "portfolio pumping," says Ben-David. Not all hedge funds pumped their portfolios, but the researchers found evidence that hedge funds that did so in one quarter were more likely to do it the next—especially if it meant the difference between showing a slightly negative and a slightly positive return. Hedge funds could make an impact on a stock with as little as US$500,000 in trades. Portfolio pumping was common before 2001, when the Securities and Exchange Commission began indicting hedge fund managers who engaged in the practice. But this study suggests that the practice isn't completely extinct. "This is a legal gray area," says Ben-David. "If a hedge fund were to be seen doing this systematically, the SEC would be interested in investigating." Even so, it's important for investors to be aware of the practice and interpret such end-of-period trading accordingly. "Investors always hear most about the top ten funds, so fund managers all want to appear in that list. That gives a strong incentive to hedge funds to manipulate when they are near the top," says Ben-David. "Do Hedge Funds Manipulate Stock Prices?" is forthcoming in the Journal of Finance and is available for preview at ssrn.com/abstract=1763225. Expense Ratios Hide 'Invisible Costs' A recent study brings into question whether a stock's published expense ratio is an accurate measure of performance. Co-authors Roger Edelen of the Graduate School of Management at the University of California-Davis, Richard Evans of the University of Virginia's Darden School of Business in Char lottesville, and Gregory Kadlec of Virginia Tech's Pamplin College of Business in Blacksburg find that some costs fall outside the expense ratio tabulation. 56 May/June 2013 BizEd Considered one of the few reliable predictors of mutual fund performance, the expense ratio represents the percentage of the fund's assets that cover the fund's operating expenses. Investors are often drawn to mutual funds with the lowest expense ratios because of the lower cost of ownership. However, after analyzing portfolio holdings and transaction data for nearly 1,800 equity funds from 1995 to 2006, the researchers found that the average expenditures on trading costs—or aggregate costs—of the funds was 1.44 per- Marco An dras/G low I mag es In their examination of hedge fund data from