Hedge Funds and “Stock Manipulation”

Via AllAboutAlpha.

The researchers also found that this “manipulation” is more likely to occur in stocks owned by hedge funds with less diversified portfolios.  After all, it’s those funds that stand to gain the most by artificially inflating prices, since the stock in question has a larger impact on the fund’s overall performance.

They also find that stocks owned by hedge funds having a stellar year are more likely to be “manipulated” than stocks owned by poorly performing hedge funds.  The logic is a bit more muddled here though.  The authors suggest the incentives to manipulate are higher when funds are “competing for the highest positions on the list.”  Yet they also argue that manipulation is beneficial for hedge funds “…because is allows them to avoid a highly negative return…”.

New and smaller funds are fingered in the report since they have a higher “performance-flow” relationship.  (See this post for more on the propensity for new and small funds to avoid tiny losses and apparently to turn them into tiny gains).

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