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Gideon Ozik Benedicte Gravrand, Opalesque Geneva:
According to a new study by researchers from Boston College and EDHEC Business School, the practice of front running is more common than we think. Managers of share-restricted hedge funds often sell off their own holdings ahead of their investors, in order to avoid low returns produced by an outflow of shareholder dollars. But they don’t just stop there.
The common definition of front running is the unethical practice of a broker trading an equity, based on information from the analyst department, before his or her clients have been given the information.
In the study in question, front running pits the interests of managers against those of investors in hedge funds. The latter’s actions are limited by contract, through lock-ups and redemption notice periods for example (in order to protect the common interests of all investors), and there is usually little transparency anyway.
As good practitioners of nepotism, some of those managers who act in advance based on the information they have (and which investors don’t yet know about), let their preferred clients in on the action to protect them from down performance too. Researchers stay that the flow of funds can help predict this phenomenon.
Analyzing data from the privately-held funds, Boston College Professor of Finance and
EDHEC researcher Gideon Ozik identified 56 e...................... To view our full article Click here
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