This is a proceeding against Gabelli Funds, an investment adviser to mutual funds, based upon its undisclosed market-timing agreement in which it permitted a hedge fund investment manager based in the United Kingdom (the “U.K. hedge fund manager”) to market time a mutual fund managed by Gabelli Funds from September 1999 to August 2002 while Gabelli Funds otherwise monitored for and rejected market-timing purchases from other investors of the mutual fund. Approximately six months after the market timing commenced, Gabelli Funds also allowed the U.K. hedge fund manager to increase its market-timing capacity in exchange for the U.K. hedge fund manager’s long-term investment in an affiliated hedge fund. Market timing of mutual funds includes (a) frequent buying and selling of shares of the same mutual fund or (b) buying or selling mutual fund shares in order to exploit inefficiencies in mutual fund pricing. Market timing, while not illegal per se, can harm mutual fund shareholders because it can (a) dilute the value of their shares if the market timer is exploiting pricing inefficiencies, (b) disrupt the management of the mutual fund’s investment portfolio, and/or (c) cause the targeted mutual fund to incur considerable extra costs associated with the excessive trading which are borne by other shareholders. From September 1999 until August 2002 (the “relevant period”), Gabelli Funds allowed the U.K. hedge fund manager to market time the Gabelli Global Growth Fund (“GGGF” or “the Fund”) on behalf of a hedge fund managed by the U.K. hedge fund manager.2 In April 2000, Gabelli Funds permitted the U.K. hedge fund manager to increase the amount of money it could use to make market-timing trades in GGGF in exchange for a $1 million investment in the Gabelli Global Partners Fund (“Global Partners Fund”), a hedge fund advised by a Gabelli Funds affiliate. The same portfolio manager managed both GGGF and the Global Partners Fund. Gabelli Funds permitted the U.K. hedge fund manager’s market timing even though it was inconsistent with Gabelli Funds’ practice, as disclosed to the Gabelli Global Series Board of Directors,3 of 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 GGGF was called the Gabelli Global Interactive Couch Potato Fund until January 13, 2000 when its name was changed to Gabelli Global Growth Fund. The Fund’s name was changed again on November 16, 2005 to GAMCO Global Growth Fund. 3 GGGF is part of the Gabelli Global Series.
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monitoring for market timing in its funds and taking steps to stop market timing, including barring market timers. During the relevant period, the U.K. hedge fund manager executed approximately 399 round-trip market-timing trades in GGGF with an aggregate volume of approximately $4.2 billion, while GGGF’s net assets during that period ranged from approximately $100.2 million to $563 million. On 115 days, the accounts managed by the U.K. hedge fund manager had an aggregated investment in GGGF that exceeded three percent of GGGF’s total outstanding shares. The frequent trading was detrimental to the long-term shareholders of GGGF. While the U.K. hedge fund manager’s three accounts earned internal rates of return from its trading in GGGF of 185 percent, 160 percent, and 73 percent respectively during the relevant period, GGGF had an internal rate of return during the same period of negative 24.1 percent. The U.K. hedge fund manager’s trading was so extensive that approximately 62 percent of the total dollar value of all purchases and redemptions in GGGF during the relevant period were short-term trades by the U.K. hedge fund manager.