To some it brings back memories of the Wall Street speculators of the 1920s. Then, short-selling speculators reaped large profits and other investors often were wiped out as stocks dropped through the floor.
The parallels to today's more carefully monitored market are not precise. But they are close enough to have triggered a Securities and Exchange Commission investigation, a probe by the New York Stock Exchange and a class action suit.
The focus of all this concern is a purposely secretive group of investment companies known as hedge funds.
Hedge funds are essentially private mutual funds for the wealthy investor. Little is known about them, but they are among the most hyperactive, potent participants in today's stock market.
Brokers say that a single $20 million hedge fund can generate more in commission revenues in a year of in-and-out trading then can a $1 billion pension fund.
At the same time, the hedge funds are among the least visible of the big traders, due in large part to their historic exemption from regulation by the Securities and Exchange Commission based on their small size and private-partnership status.
Now, however, a recent federal court ruling and a wide-ranging SEC investigation into hedge funds - with allegations that some have engaged in market manipulation - could change all that, possibly an end to this lucrative but unscrutinized investment vehicle.
The names of even the most successful hedge funds-such as Marc Howard Associates, A. W. Jones Associates, Robert Wilson Associates, and Steinhardt, Fine, Berkowitz - would be unfamiliar to most investors.
Most precisely defined as private investment partnerships, the funds consist of cash pooled by groups of individual investors - frequently rich businessmen, doctors and celebrities - who are the limited partners. The money is managed by the general partners, who actually play the market.
It usually takes a minimum of $100,000 to enter a hedge fund, and the opening ante can be as high as $500,000. The most successful hedge funds indicate they are not looking for, nor will they accept, any new clients.
The investment techniques vary, but the funds are characteristically highly leveraged, and the managers plunge in stocks on both the long and short side, which is where the hedge theoretically come in - though often it is less a hedge than outright speculation in both directions. Other speculative devices such as options also are employed to give fund further flexibility.
Of course, there are exceptions to this general description. Some hedge funds never use leverage. Others never go short. Some do little trading, preferring to concentrate on special situations, buying stocks for the long haul or shorting high-flying stocks whose prices the funds eventually expect to collapse.
The funds number about 50 - reduced by the ravages of the 1970 and 1973-74 bear markets from approximately 200 in their heyday nearly a decade ago - and they range in size from $2 million to about $100 million. But no one including the SEC, is quite sure about any of the statistics.
"Nobody knows all of them, just like nobody knows who all the millionaires in the United States are," observed Richard Valentine, a New York attorney who represents several of the hedge funds.
Compensation for the general partners is usually set at 20 per cent of a year's aggregate profits. The incentive is sufficient to attract what are reputed to be some of the smartest and most inconoclastic minds on Wall Street.
While the hedge funds are small compared to their brethren, the public mutual funds, and puny compared to some of the big pension funds, their clout comes from their frenetic trading activity and their reputation for uncanny shrewdness.
The reputed returns on some funds is astronomical, if unverifiable.
Marc Howard Associates, considered by many to be the most successful of the hedge funds currently operating reportedly has appreciated by 1.250 per cent over the eight years of the fund's existence, while the Dow Jones Industrial average is up only 7 per cent for the same period.
Other funds claim compound annual returns of 20 per cent and more, year after year, and both bull and bear markets. But some of the people who deal with the funds regularly feel that their performance is related not only to investment savvy, but to their position at the hub of Wall Street's trading activity. Also helpful is their status as favored customers of the brokers because of the large commission dollars they generate.
"There's no question they have an edge over other investors in the way they're structured," said one Wall Street trader who handles funds regularly. "They don't need committee meetings. They can act on the spur of the second and they do."
"They do have an unfair advantage," another top trader with a big insitutional brokerage firm volunteered. "The smartest guys in Wall Street are always passing information to these people because they get paid for it" through commissions.
"They have uncanny sources of information," according to another trader. "I've seen them do things and wondered why, and shortly thereafter they are confirmed by events."
The salad days, however, may be over for the funds.
In February, the U. S. Court of Appeals for the 2d Circuit ruled 2 to 1 in the case of Abrahamson vs. Fleschner, Becker that hedge funds fall under the provisions of the Investment Advisers Act of 1940.
This ruling would open up hedge funds with 15 or more limited partners to registration under the act, and therefore to regulation by the SEC.
More important to the funds, however, it also would end the present generous incentive compensation arrangement for the general partners. The Investment Advisers Act prohibits compensation based on performance.
"As a practical matter, if the decision fund," seasoned New York securities lawyer Martin Lipton wrote to his client after the decision.
Attorneys for the hedge funds are working assiduosly to get the ruling reversed and are in the process of getting a arehearing from the same court. They are asking, in effect, if the court had considered sufficiently what it was doing.
Their argument is that this question was inserted unnecessarily into the overall ruling which upheld the right of limited partners in a hedge fund to sue the general partners under the federal securities laws.
At the SEC, the Abrahamson decision "renewed interest in the field," according to Lee Spencer, chief counsel of the commission's division of investment management.
He indicated that the commission, which addressed the issue inconclusively in the early 1970s, once again is tackling the question of whether the funds should be regulated by, and perhaps registered with, the SEC as broker-dealers because of their trading activity and impact on the market.
The court is expected to call upon the SEC for guidance when a rehearsing takes place.
Meanwhile. The funds also have run afoul of the SEC's division of enforcement. Last month, the division obtained a broad investigative order from the full commission, along with subpoena power, to look into allegations that some hedge funds may be engaging in stock market manipulation or may have unfair advantages over other traders when it comes to access to market information.
"Because of certain pending matters involving hedge funds before the commission. I cannot comment on anything to do with hedge funds," was all SEC enforcement chief Stanley Sporkin would say.
But sources indicated that the probe is looking at the possibility that some hedge funds might be benefitting improperly from market information - an area that is shadowy and, unlike the use of "inside information" about a company, never has been defined clearly as a violation by either the commission or the courts. There are charges as well that the funds have manipulated the market in certain stocks.
The investigation also encompasses a careful lock at the explosive allegations contained in a recent stockholder class action suit against four of the funds - Marc Howard Associates, Robert Wilson Associates, Cumberland Associates and Boxwood Associates - and against Alan Abelson, the influential and widely read columnist for Baron's National Business and Financial Weekly.
The suit, brought by a shareholder of Technicare Corp., charges that the hedge funds have conspired to manipulate the price of Technicare, holding it down through concerted short selling, or the sale of borrowed stock in anticipation that the price will go down so a profit can be made when the position is covered.
The suit further charges that Abelson and his publication, which is owned by Dow Jones & Co,. aided the short sellers through periodic negative write-ups on the company in his weekly "Up and Down Wall Street" column. It claims that the short sellers were tipped "in advance of publication" when an item would appear so they could set up their short positions. Managers of the hedge funds declined to comment on the suit advice of counsel.
The charges are denied vigorously by Abelson, Baron's editor Robert Bleiberg, who is also defendant, and by Dow Jones.
"Back in the 1960s, people used to threaten to punch me in the nose when I said something negative about a company. Now we live in different times," Abelson responded. "The suit is obviously an attempt to keep me quiet," he said. He added that there was "quite nothing to it."
Technicare, which has grown at a compound growth rate of 80 per cent annually for the last five years - primarily through its positions as one of the leading manufacturers of computerized axial tomographers, expensive new medical devices that can take cross-section pictures of the brain and body for diagnostic purposes - also has had one of the largest short positions, unrelated to arbitrage, on the New York Stock Exchange.
The short position climbed as high a 240,000 shares earlier this year, dropping just below 200,000 in the most recent monthly report. A large short position often is considered bullish for a stock because the shorts must cover their position at some point through purchases.
Abelson, who has not mentioned the short position in his five write-ups of Technicare, said "I rarely look at short positons." He said he considered this piece of information, which might be of interest to investors, "irrelevant" because "I don't talk about a company's prospects in the stock market" in the column.
He said he has done several write-ups on the company, which otherwise has had little attention from the business press, because "when we start on one of these stories, we look on it as a narrative. I am attempting to describe a conflict between technological advance on the one hand, and enormous economic cost on the other . . . My own feeling is that they're just up against a historical trend to make it very difficult for them to continue to grow."
The brokerage firms recommending the stock, meanwhile, predict a 50 per cent profit increase in fiscal 1978 on top of an anticipated 100 per cent increase in current fiscal year for Technicare.
Abelson acknowledged that hedge funds sometimes serve as sources for him, but said most of his leads and the bulk of his material come from readers.
He said that Robert Wilson, one of the defendants in the suit, has been a friend of his since 1968 and he talks to him five or six times a year. "I don't talk stocks with him very much. I might talk about the market much more," he said. Abelson said he generally was unaware of what Wilson's hedge fund portfolio holdings are, and that he had no information about any position he had or has in Technicare.
In the Wall Street Letter, a securities industry newsletter, Wilson recently was quoted in connection with items that appear in Abelson's column as saying that "in the past, have urged him to recommend - and to disrecommend - stocks, and he's done it. My participation in the stock was always before any article, although sometimes I have added to it after."
In the following week's issue, Wilson contended he did not think he was quoted accurately. And even if he did say it. "That's not what I meant," Wilson stated. "While I do discuss many ideas with (Abelson) and urge upon him the merits of these, I would never presume to recommend them. The prices of stock have a way of taking care of themselves no matter what Mr. Abelson writes about them."
Abelson, noting there has been no allegation in the suit that he either has traded in Technicare or profited from the alleged conspiracy, said he didn't "understand why (the plaintiffs) think I'm so altruistic, that I'm going to call these guys (the hedge funds) and tell them that I have an article coming up."
Barron's editor Robert Bleiberg, who has been with the magazine for 31 years, readily acknowledged the impact an article or item in Barrons can have on a company's stock. He said special efforts are made to safeguard this information prior to publication.
He said Abelson and other writers for the publication explicitly are told not to give any indication, in the course of reporting a story, about whether and when an article will appear.
"In the kind of world we live in, it's got to be very difficult for people to believe that Alan and I sitting on this mountain for power, are only doing this for our readers," said Bleiberg.
"What are they doing there if they don't have Swiss bank accounts and secrets deals?' some probably ask. But we don't."
Dow Jones president and chief excutive officer Warren H. Phillips has said the suit is an effort to intimidate the press and deter unfavorable stories about companies in his publication. Phillips said he welcomed a full investigation by the SEC.
Sources at the commission indicate they are happy about the invitation, given the sensitive First Amendment issues involved and touchy question of a financial reporter's sources of information.
The Technicare case is just one aspect of the SEC's probe of the the hedge funds and allegations of collusion with Abelson.
The commission's staff has hear charges similar to those contained in the Technicare suit from brokers and from shareholders in other stocks, including Centronics, International Systems and Controls, and Olympia Brewing. What these stocks have in common is a large short position believed to be largely held by a small number of hedge funds, and the fact that they were written up negatively by Abelson.
In a separate probe, the commission is looking into the alleged role of the hedge funds in shorting Olympia Brewing prior to the March collapse of its price from $60 to its current $30.
The precipitous drop in Olympia stock following a negative appraisal of the company by Abelson in the March 7 issue of Barrons in turn triggered the collapse of a small Chicago brokerage firm, Swift, Henke and Co., where a broker had put many of his customers deeply into the stock on the long side. The first trading day after Abelson's column appeared, the stock dropped more than 11 points. It lost 28 points that week. The severe price decline set off a series of liquidations when customers could not meet margin calls, further reducing the price of the stock.
Sources familiar with the investigation say the situation is reminiscent of the free-wheeling bull and bear battles of the 1920s, a situation which the SEC was established in part to eliminate.
As part of its probe of the hedge funds and the allegations against Abelson, the commission is poring over trading records. So far, it has asked for the flies from two of Wall Street's most prestigious firms - Bear, Stearns and Co., and Loeb, Rhoades and Co. - both of whom do extensive trading for the hedge funds.