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By Gary D. Halbert
September 16, 2003



1.  The Recent Hedge Fund/Mutual Fund Scandal.

2.  Some Mutual Funds Have A Double Standard.

3.  Market Timing Strategies Get A Bad Rap.

4.  The Definitive Case For Market Timing.


This week I will introduce you to a new study which presents the strongest case for using market timing that I have ever seen.  The new study is too long to include in this E-Letter, but I have written a complete analysis in my September Forecasts & Trends newsletter, and a direct link to that newsletter is included below.  I highly recommend you read it.

In this issue, I also discuss the recent scandal involving one or more hedge funds which were allegedly doing illegal, after-hours trading of certain mutual funds, and doing so with the consent of the fund families.  The investigation is still ongoing, and more shoes are expected to drop.

The Hedge Fund / Mutual Fund Scandal

On September 3, we read in the financial papers that a large hedge fund had agreed to pay $30 million in restitution of illegally obtained profits from after hours mutual fund trading, plus a $10 million penalty for doing so.  The hedge fund noted in the announcement was Canary Capital Partners LLC and is reportedly part of a much larger investigation into such practices by New York’s Attorney General, Eliot Spitzer.

Canary (and perhaps other large hedge funds) allegedly obtained special trading opportunities with several leading mutual fund families – reportedly including Bank of America’s Nations Funds, Banc One, Janus and Strong – by promising to make substantial investments in various mutual funds offered by these firms.

The special trading opportunities, in this case fraudulent trading opportunities, consisted primarily of so-called “late trading” of mutual funds after the stock markets close at 4:00 eastern time.  If you or I, for example, want to make a purchase or sale of a mutual fund, we have to get our orders in to the fund family before the close of the markets, sometimes 30 minutes or more before the markets close. If you or I place our order after the markets close at 4:00 today, then we don’t get that order filled until tomorrow at the 4:00 closing price.

In the case of Canary, the mutual funds noted above (and possibly others) allegedly allowed Canary (and others) to place its orders AFTER the markets closed and still get the closing price for the same day.  As you know, there are frequently announcements just after the markets close that can have significant effects on the markets the following day.  Allowing large hedge funds to trade after hours is illegal and it serves to reduce profits and/or increase losses to the other shareholders of the mutual funds! 

Why Would The Fund Families Do This? 

What is most surprising to me is that these very large mutual fund families would have engaged in these illegal practices, apparently for several years in some cases, in the first place.  The answer, as usual, is making more money.  According to information disclosed by Eliot Spitzer, Bank of America made $2.25 million per year from these companies and/or hedge funds in special payments and other incentives.

The investigation of illegal trading at mutual fund families is ongoing.  Some feel that the investigation by New York’s Eliot Spitzer may be just the tip of the iceberg, and that numerous other fund families will be cited in the weeks ahead.  Obviously, as this information is made public, it will be bad news for the fund families that are cited.  For example, Morningstar has already released a statement advising investors to move their money out of the four fund families (noted above) named by Spitzer in his complaint.  If the scandal is larger and if other mutual fund families are cited, then Morningstar will be hard pressed not to offer the same advice for them.

No doubt, some investors will sell their shares in such mutual fund families and move to others.  IF regulators show this to be a widespread problem among many mutual fund families, mutual funds will be far less attractive as investments.  The net result is that mutual funds could experience major outflows and/or transfers to fund families that can show that they do not cut special deals with big players. 

If this practice is found to be widespread, it could prove to be a major credibility issue for the mutual fund industry in general.  If many funds are forced to sell assets to pay redemptions, it will not be good for the stock market either.  Hopefully, these practices are limited to only a handful of fund families, and there won’t be a stampede out of mutual funds.  However, we need to stay tuned to this story as it has the potential to be very disruptive to the markets.  I’ll keep you posted as things develop. 

The Problem With Spitzer’s Announcement

When Eliot Spitzer made his announcement on September 3, he referred to this illegal after-hours trading as “late trading” which is accurate.  But he also criticized the hedge fund’s use of short-term trading, and in doing so used the term “market timing.”  What these funds were doing is NOT an accurate characterization of market timing, in my opinion. 

The short-term trading of mutual funds that Canary (and apparently others) was doing is not illegal.  It was the after-hours trading that was illegal.  The term market timing, as I will discuss below, does NOT relate to the fraudulent, after hours trading that was discovered by Spitzer’s investigation.

Some mutual funds discourage short-term trading because it can cause problems for the fund managers if large blocks of money move in and out of the funds frequently.  So, some funds actually prohibit such short-term trading in their prospectuses, and they retain the right to redeem (force out) customers who trade too frequently.  The four fund families noted above actually had such prohibitive policies on short-term trading in their prospectuses.   

Mr. Spitzer said the funds operated under a double standard, in that the Canary fund and apparently other big players were allowed to execute short-term trades even while everyone else was precluded from doing so.  Again, the problem is not that short-term trades are illegal.  In fact, there are numerous fund families such as Rydex, ProFunds and others that actually welcome short-term trading. 

In addition to allowing short-term trading when their stated policies prohibited such practices, the funds named above also allegedly allowed Canary and others to place such orders after the close of the markets, which is clearly illegal. 

Market Timing – Quick Review 

Market timing is a strategy that involves moving in and out of the market periodically in an effort to miss portions of the downward moves in stocks, while being in the market for significant portions of the upward moves.  In theory, market timing would allow investors to reduce their risks during downtrends in stocks and bonds, while still earning at least market rates of return on the upside.

Market timing is practiced by many individual investors and many professional Investment Advisors.   It is in fact a very legitimate and legal investment strategy, as most of you reading this know.  However, because Mr. Spitzer chose to use those words – “market timing” - in his announcement, I fear that some investors who are not familiar with traditional market timing will confuse it with the fraudulent activities discussed above.   Nothing could be further from the truth.

To help combat the perception that market timing is somehow illegal, the Society of Asset Allocators and Fund Timers, Inc. (SAAFTI), an association of Registered Investment Advisors who practice market timing and other active management strategies, issued a rebuttal to Mr. Spitzer’s use of the term “market timing.”  The following excerpt from SAAFTI’s press release sets the record straight:

“Members of SAAFTI are recognized, registered and regulated by the U.S. Securities and Exchange Commission and individual state securities administrators. Their trading strategies are acknowledged by the regulators and their practices are regularly reviewed for compliance with state and federal regulations. Many have used timing strategies for over three decades…

There is absolutely no relationship between the strategies employed by these investment firms -- who conduct their investment management business in accordance with the rules promulgated by the SEC and state regulatory authorities -- and the example cited by Mr. Spitzer.  To draw such an inference is both irresponsible and a disservice to the investing public.”

Market Timing Is Gaining Prominence

As readers of this E-Letter know, I have been a proponent of market timing for many years.  While I believe a passive, buy-and-hold strategy is appropriate for a part of your equity portfolio, I have also maintained that a flexible, market timing strategy is also appropriate for a chunk of your equity (and bond) holdings. 

This is especially true considering that we’ve just been through a three-year bear market in stocks when it would have been a very good idea to be out of the market at least some of the time.  That is precisely what good market timing systems do.

Even now, when it appears that the bear market is over, the stock markets are still very volatile and risky.  Market timing is especially appropriate, in my opinion, in the current environment which includes the threat of terrorism and other negative surprises.

Earlier this year, I wrote about the endorsement of market timing strategies by the widely respected Bank Credit Analyst.  I have been a continuous subscriber to BCA (despite the hefty price tag) for over 25 years, and this was the first time I had ever seen them recommend market timing strategies for equity holdings.

Earlier this year, noted investment and economic consultant and author Peter Bernstein shocked the institutional investment world by uttering the following:

“What if we can no longer be so confident that stocks are necessarily the best place to be in the long run?  What if moving around more frequently is now a necessity rather than a matter of choice?  I am talking about market timing – dirty words.”

Dirty words, indeed!  In making this comment, Mr. Bernstein broke away from the herd of buy-and-hold adherents in the institutional investing and financial planning communities, and even with his own past writings and opinions.  You can read more about Mr. Bernstein’s change of heart in my September Forecasts &Trends newsletter (see LINK below).

The bottom line is that market timing is finally coming of age as an investment strategy.  Unfortunately, it took a bear market to make it happen.

The Definitive Case For Market Timing

While I’m on the subject of market timing, a recent study on the subject has revealed the most compelling information I have ever seen regarding market timing as a viable investment strategy.  The following is an introduction to the study’s findings.  A much more detailed analysis of this latest study is in my monthly Forecasts & Trends newsletter.  I’ll give you a direct link to it below.

For at least the last 27 years I have been in the business, Wall Street brokerage firms, mutual fund families and most financial advisors have maintained that market timing doesn’t work.  They have relied primarily on studies that only show the negative effects of being out of the market and missing some of the “good days” when stocks move higher.  Most of the studies I’ve seen quote what the performance results would be if you missed the 10 “best days” in the markets by using a market timing strategy.

Yet the question I have had all these years is, “But what happens if you miss some of the ‘bad days’ in the markets by using a market timing strategy?”  Well, now we know the answer!

In late August, the SAAFTI organization released a new study that analyzes investment performance if you missed BOTH the BEST days AND the WORST days in the stock market.  The study update covers the period from April 1984 through December 2002, and the results are startling – at least for Wall Street types that have criticized market timing for years!

Due to space limitations, I cannot adequately present the study in its entirety in this weekly E-Letter.  But you can read the details in the September issue of my Forecasts & Trends newsletter (see link below).  I will give you a hint, however:

The latest study by SAAFTI shows that it is far more important to miss the WORST days in the market than it is to miss the BEST days.   This information flies in the face of Wall Street’s theories about “buy-and-hold” and makes the strongest case I’ve ever seen for market timing.

You can read my complete analysis of this latest SAAFTI study by going to my September newsletter CLICK HERE.   Do it today.

I can tell you now that this information will be slow to make it into the financial media.  Why?  It flies in the face of conventional investment “wisdom.”  It raises serious questions about a buy-and-hold-ONLY investment strategy.  Don’t expect your stockbroker or financial planner to tell you about the latest SAAFTI study.

Making Market Timing Work For You

I’ll be the first to admit that it’s a lot easier for market timing to work in theory than in practice.  It might surprise you to know that I agree with the mutual fund and brokerage industry when they say that investors should not try to time the market themselves.  As the Dalbar studies that I have quoted in the past illustrate, trying to time the market on your own is difficult and can lead to disappointing results.  (See past article on the Dalbar studies at

In my opinion, the answer to successful market timing lies in the use of professionals, such as members of the SAAFTI organization.  However, even the use of a professional is not a guarantee of success.  Since 1995, my company has reviewed the results of hundreds of market timing Advisors.  To be honest, most of these Advisors were not very good, some were mediocre, but a select few were/are outstanding.

So, how do you separate the truly outstanding Advisors from those whose results will lead to disappointment?  There’s not an easy answer to this question, but you can put the odds in your favor by allowing an “ Investment Management Consultant” to work on your behalf.  These Consultants do not manage money on their own, but specialize in seeking out and evaluating third-party money managers.

The job of an Investment Management Consultant does not end when you invest with an Advisor they recommend.  Since some Advisors are successful in some market environments, but struggle in others, good Consultants continue to monitor the performance of each Advisor they recommend, preferably on a DAILY basis.

My company is an Investment Management Consultant with 20 years of experience in evaluating and monitoring money managers.  We would be happy to help you find a successful professional money manager who can introduce you to the world of market timing investment strategies.  Just give us a call at 800-348-3601, or visit us on the web at

You may be thinking that you need to have a Consultant who is in your local area.  Yet in this day and age of communication, it is not necessary.  At my company, we have clients in all 50 states, and the arrangement works very well.  Plus, the best Consultants may not be located in your area.   However, if you still prefer to have a Consultant who is located in your local area, you can contact the Investment Management Consultants Association’s website at .

As I have recently discussed in the pages of these E-Letters, The Bank Credit Analyst and other credible sources predict uncertain times in the markets, especially beyond the next 12 to 18 months, or whenever the next serious recession unfolds.  Whether or not you choose to use my company, you need to check out the definitive case for market timing in my September newsletter CLICK HERE

I trust you will find the latest SAAFTI data showing that it is more important to miss the bad days in the market than the good days as convincing as I did when it comes to market timing strategies.  Given the times we live in, and the potential for serious problems for the economy in the years ahead, you may be wise to familiarize yourself with market timing now.

Best regards,

Gary D. Halbert


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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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