Wilshire maintains that it did not violate any securities laws with its hedge strategy that involved the short-term mutual fund trades in 1993. However, after an earlier report in MONEY magazine brought the strategy to light, the SEC initiated its examination, according to a news release.
The October MONEY report –“The Great Fund Rip-Off” – says the rapid-fire trades were arranged in advance and sometimes amounted to trades over $100 million worth of mutual funds in a day. This was despite the fact that most fund prospectuses explicitly stated that they discouraged this sort of churning (See MONEY: Wilshire Conducted Rapid-Fire Mutual Fund Trading Strategy ).
Begun by Wilshire roughly a decade ago, the report said the quick turnover of mutual funds was part of a hedging strategy, in which Wilshire would short sell index futures that were slightly overvalued and simultaneously buy a basket of at least 10 mutual funds. When the value of the index futures dropped, Wilshire would cover its position. Further the MONEY report raised the question about possible conflicts of interest for fund companies that knew that Wilshire might (or might not) recommend them when its clients searched for money managers to make special allowances for Wilshire by permitting the rapid trading.
However, Santa Monica, California-based Wilshire said it “never asked for or expected any preferential treatment from any mutual fund while pursuing any investment strategy” in the statement. At most, the strategy returned 30% in its best year and was discontinued on behalf of its clients by the end of the first quarter of 2002. Wilshire stopped using the strategy for its own accounts earlier this year, the company said.