HONG KONG - The Securities and Futures Commission has found evidence of late trading by two hedge funds in the First State Global Umbrella Fund and today settled with the manager.
In the second half of 2004, the SFC conducted a theme inspection of fund managers to determine the extent of market timing and late trading was occurring in the Hong Kong market. As most funds in Hong Kong trade Asian equities, there is only a very narrow window in which to take advantage of information.
Between April to June 2003, First State Investments (Hong Kong), FSIHK, acting in its capacity as Hong Kong representative of the Fund, forwarded trades from two hedge funds, SII Limited and Pendleton Limited, in relation to eight sub funds of the Fund, to the Fund’s administrator in Dublin for processing after the dealing cut-off time of 10am, Dublin time. FSIHK forwarded late trades from SII Limited on nine trading days and from Pendleton Limited on seven trading days.
During this period, SII Limited and Pendleton Limited were permitted to notify FSIHK of their intention to trade by 10am Dublin time, and to then follow it up with order details by 4pm, despite the prospectus of the fund stipulating a 10am Dubline time cut-off time.
The SFC was concerned that, by passing on the late trades, FSIHK’s two hedge fund clients may have had the opportunity to observe the market closing position in London and the first one and a half hours of trading in New York.
“Dealing deadlines stipulated in offering documents must be adhered to by all parties and cannot be changed for anyone,” commented Alexa Lam (pictured), SFC executive director of Intermediaries and Investment Products. “Allowing late trading directly facilitates market timers to take advantage of the market movements, which are not available to other investors. Fund managers should ensure there is clear disclosure about their dealing and valuation cut- off times and that these are complied with strictly.”
FSIHK voluntarily agreed, without admission of fault or liability, to make ex-gratia payments of US$10,000 to each of the eight affected sub funds of the fund, one of which is terminated, and consequently payment was made to the Hong Kong Community Chest instead.
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