The Economics Of The Mutual Fund Trading Scandal

The author examines the economic incentives behind the mutual fund trading scandal, which made headlines in late 2003 with news that several asset management companies had arranged to allow abusive - and, in some cases, illegal - trades in their mutual funds. Most of the gains from these trades went to the traders who pursued market-timing and late-trading strategies. The costs were largely borne by buy-and-hold investors, and, eventually, by the management companies themselves. A puzzle emerges when one examines the scandal from the perspective of those management companies.