Portfolio Pumping
What Is Portfolio Pumping?
Portfolio pumping, otherwise called "painting the tape," is the practice of falsely blowing up the performance of an investment portfolio. It is regularly finished overwhelmingly of shares in existing positions, shortly before the end of the reporting period.
This practice is especially common among investment funds that hold positions in generally illiquid securities on the grounds that the prices of such securities can be all the more effectively controlled. Securities regulators, like the Securities and Exchange Commission (SEC), look to recognize and authorize this behavior by monitoring suspicious transactions.
Understanding Portfolio Pumping
Portfolio pumping is unsafe to investors since it gives an incorrect impression of portfolio performance. This thus can lead investment managers to collect incentive fees that are not justified by their real performance.
To show, consider a investment fund that possesses shares of XYZ Corporation, purchased at $10 per share. On the off chance that those shares are valued at $7 shortly prior to the investment fund's reporting period, a corrupt manager could expand their value by setting a large volume of new orders for the stock at a swelled [bid price](/bidprice, for example, $14 per share.
In the short term, this new demand would help the fund's stated performance, in light of the fact that the position in XYZ would now be valued at $14 per share as opposed to $7. Soon after the manipulation, in any case, the shares would almost certainly return to their $7 value.
History of Portfolio Pumping
Portfolio pumping started earning far reaching consideration following the publication of an article in 2002, named "Inclining for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds." This article, which was distributed in The Journal of Finance, gave obvious proof that portfolio pumping is a far and wide phenomenon.
Following this research, the SEC and different regulators increased their oversight of portfolio pumping. In any case, there is motivation to accept that the phenomenon proceeds right up to the present day.
In 2017, a researcher from the University of Texas distributed a review — named "Portfolio Pumping in Mutual Fund Families" — in which he framed how some fund managers have kept on utilizing portfolio pumping strategies by taking advantage of legal provisos in the regulatory system.
Portfolio pumping among U.S. equity mutual funds is demonstrated to be more predominant in single-oversaw funds as opposed to group oversaw funds; by 45%.
Today, dishonest investment managers can likewise utilize high-frequency trading (HTF) advances to execute portfolio pumping schemes. This practice has been the subject of special examination by the SEC, who can rebuff offenses by forcing civil fines and by restricting entertainers from working inside the securities industry.
Fortunately, the very advanced innovations that are utilized to control investors can likewise be utilized to distinguish and hinder manipulation. With that in mind, regulators utilize an assortment of advanced analytics software to monitor suspicious trading designs by utilizing price and volume data from different markets.
True Example
In 2014, the SEC charged the hedge fund Archer Advisors LLC with portfolio pumping and bilking investors, specifically its owner Steven R. Markusen and an employee, Jay C. Cope. The portfolio pumping scheme was carried out on the stock of CyberOptics Corp.; a thinly traded stock.
The stock made up more than 75% of Archer's holdings, so Markusen and Cope knew that any trading they did on the stock would impact its price. They "denoted the close" on the last trading day of the month 28 times.
This implied that they put in various buy requests on the stock before closing to drive up the closing price, which falsely expanded (pumped up) the value of Archer's current holdings. The holdings were valued toward the end of the closing day.
This value was utilized in the calculation of month to month returns that appeared in the fund's prospectus and reported to investors. The returns were likewise used to compute the fund's management fee.
Highlights
- Portfolio pumping assists a fund with looking more appealing and permits fund managers to create more fees.
- It is finished by purchasing shares in existing positions shortly before reporting portfolio performance.
- Whenever got, portfolio pumping leads to punishments and trading license suspensions for the culprits.
- Public awareness of portfolio pumping has been increased by a series of compelling scholastic articles, and the practice is presently more firmly monitored by securities regulators.
- Portfolio pumping is the practice of misleadingly swelling portfolio performance.
FAQ
Is Marking the Close Illegal?
It is illegal to Mark the close. The SEC's definition of "denoting the close" is "endeavoring to influence the closing price of a stock by executing purchase or sale orders at or close to the close of the market."
Does Portfolio Pumping Manipulate Morningstar Fund Ratings?
Indeed, studies show that a few mutual funds pump portfolios to further develop their Morningstar ratings. These funds swell their month-end values related to month-end rating shorts by Morningstar. Initially, pumping happened during quarter-or year-end yet due to increased investigation, this presently occurs at random month ends.
What Are the Penalties for a Portfolio Pumping Scheme?
The punishments for a portfolio scheme are fundamentally fines issued to the culprits. The fines change in size and relate to the amount that the culprits swindled investors. Punishments additionally incorporate the suspension or termination of trading licenses.
What Is a Pump and Dump Scheme?
Pump and dump schemes are executed by people that hold a specific stock. These people then, at that point, publicity up the stock, through recommendations, false advertising, or other wicked means with no genuine thinking or truth, to allure others to buy up the stock, consequently expanding its value. When the value of their shares has gone up, they dump the stock, earning a profit.
