This is the hot new way hedge funds are tricking the market without breaking the law

hand in the cookie jar

(flickr user Mark JP)

There’s a hot new way to game the stock market, and it’s not even illegal.

Bloomberg’s Yuji Nakamura reports that hedge funds and traders can simply purchase stocks before they're added to the indexes, like the S&P 500, on which the index mutual funds build their portfolios.

It's like front-running, but legal.

And it means that traders benefit while index funds miss out.

Regular American investors lose out, too, as more and more people are choosing index funds over riskier investment vehicles.

How much are they actually losing to the front-runners? At least 0.2 percentage points (or about $4.3 billion in 2014) for S&P tracker funds, according to research cited by Bloomberg.

Some passive funds, like Vanguard Group, are trying to foresee which stocks will be added to the indexes, and slowly buy in ahead of time.

Another way the mutual funds can guard against the front-runners, according to Bloomberg, is to simply own, basically, everything in the market. That way, there are no stocks left to arbitrage.

Read the full story over at Bloomberg »

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