Tarred by Market-Timing Brush, Hedge Funds Quit the Business

Hedge funds that used to rack up hefty profits trading mutual funds are running scared, even if they haven't done anything wrong.

Investigations in New York and Massachusetts turned up the heat on market-timing hedge funds, and some of them are getting out of the mutual fund kitchen altogether. The ripple effect from New York State Attorney General Elliot Spitzer's investigation into late-trading arrangements between mutual fund companies and hedge funds has affected businesses from Manhattan to Malta, shuttering funds and zipping lips as the controversy unspools.

"A lot of them may be feeling very paranoid," said Dermot Butler, chairman of Custom House Group, a Dublin company that does hedge fund administration and other support work for funds and managers.

The term "market timing" still covers the legal practice of rapidly trading in and out of financial instruments, but has been conflated to automatically mean "market cheating," a development fund managers contacted for this story decried.

With the exception of a $40 million settlement with Canary Capital Partners and an investigation of Veras Capital Partners, criminal prosecutors are currently concentrating more on mutual fund executives than hedge fund managers.

But hedge funds, including Tidewater Capital, Peconic Capital Fund, Diamant Asset Management, Diamant Master Fund, Lighthouse Multi-Strategy Fund and Veras are mentioned in a Securities and Exchange Commission subpoena of brokerage A. Brean Murray issued last week, according to reports. Spitzer has also subpoenaed the $3.5 billion Trout Trading Fund, run by Bermuda-based Trout Trading Management Company, now renamed Tewksbury Capital Management; the $80 million Haidar Capital Management; and Samaritan Asset Management.

Ritchie Capital Management, Cambridge, Mass.-based Chronos Asset Management and two london firms, Pentagon Capital Management and Headstart Advisers, are mentioned in Massachusetts Secretary of the Commonwealth William Galvin's civil complaint, which came out at the same time as the SEC's charges of civil fraud by seven Prudential Securities employees.