NEW YORK, July 3 (UPI) -- Managers of U.S. hedge funds may be making illegal trades before the funds' loans to companies are announced publicly, research indicates.
Researchers found some companies that borrowed from hedge funds instead of banks saw sharp spikes in the volume of short sales, or bets against the company's shares, in the five days before a loan from the hedge fund was announced publicly, The Wall Street Journal reported Saturday. That suggests illegal trading by hedge fund managers or others with knowledge of the loans, the newspaper said.
"Hedge fund lenders, like banks, are 'quasi-insiders' and thus privy to private information about the performance of borrowing firms," the researchers said in a study to be published in the Journal of Financial Economics. The study tracks trading of 105 U.S. companies that borrowed from hedge funds from January 2005-July 2007.
The average company receiving a new loan from hedge funds had a 74.8 percent increase in the volume of short sales in the five days preceding announcement of the new loan, compared with short-selling volume 60 days before the deal, the study said.
The researchers noted 255 similar companies that got loans from banks saw little change in short sales in the five days before announcement of new loans.
The Journal said investigation is needed to determine whether a spike in short selling just before a loan is announced means hedge fund lenders are trading against their borrowers or leaking information.
"Our study raises important questions about regulating hedge funds when they make loans," said study co-author Debarshi Nandy of York University's Schulich School of Business in Toronto.
