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Portfolio Pumping by Money Managers

A recent Wall Street Journal article profiles the use of portfolio pumping, especially by unregistered funds, to increase portfolio values at the end of reporting periods. Portfolio pumping is a practice whereby money managers bid aggressively for shares of a stock they already own at the end of a reporting period in order to drive up the value of their entire position in the stock.  This improves the fund’s reported performance which increases the fund’s attractiveness and can boost adviser fees (if the fund collects a performance-based fee).  However, portfolio pumping also distorts prices on the U.S. stock exchanges and is considered by the SEC to be deceptive trading under the federal securities laws.  The practice is an area of “ongoing interest” in the agency’s enforcement investigations and since the beginning of last year, the SEC has brought at least three cases against money managers for window dressing practices. The Wall Street Journal’s own analysis of daily trading of about 10,000 stocks since 2004 found that:

“[O]n the final trading day of each quarter, there was a sharp increase in the number of stocks that beat the market by at least five percentage points, then trailed it by three points or more the next trading day.  The Journal's analysis compared the performance of those 10,000 stocks to the one-day return of the Standard & Poor's 500-stock index. On days that didn't end the quarter, an average of 217 stocks beat that index by at least 5 percentage points then trailed it by at least three the next day. But on the final trading days of quarters, an average of 280 stocks did.”

The Wall Street Journal article can be found here (subscription required).