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

"That business is over," he says.

Meha Arebi, of Cougar Asset Management on the Mediterranean island nation of Malta, said the firm shut down its market-timing Isis Fund, rolling over investors' $26 million into a global macro strategy.

"When the scandal came out, we decided that the strategy could cause problems," she said.

In Europe, it is.

In London, which has the second-largest concentration of hedge funds behind New York, the market-timing scandal spawned a few inquiries and a fair bit of nervous silence.

"I know a nubmer of people in Europe who will not deal in American funds," Butler said. "They are terrified of litigation and the class-action mentality."

Headstart Advisers, the $760 million London firm named as a Prudential trading partner in the Massachusetts complaint, didn't return repeated calls for comment. Headstart's funds investing in the U.S. market were down 18% for 2002 and its global funds were up 2.9% in 2002 and are up 7% for the year to date, according figures from U.K. consultancy Allenbridge, which researches hedge funds.

Allenbridge, which also advises investors on unit trusts, the U.K. term for mutual funds, surveyed U.K. mutual funds to see which allow market timers to trade their funds.

Most said they had no agreements with hedge funds, though one or two said they'd had agreements in the past and scrapped them, according to Jacob Schmidt, Allenbridge's director of hedge fund research. "It seems that no one is now involved -- I can't believe that."

"This is not a hedge fund problem -- this is an industry problem, a mutual fund company problem," he said. "I think the hedge fund community that is involved in this is perhaps not even 1% of all hedge funds. I don't think the major players are hedge funds, but the mutual funds who allowed it."