Another ethics question

Fellas, Another werid one from Ethics: Recently, John CFA, a hedge fund manager has been purchasing large quantities of Clean Coal’s common stock while at the same time shorting put options on the same stock. John did not notify his clients of the trades althoughy they were aware of the fund’s general strategy to generate returns. whic of the following is most likely correct? John 1. did not violate any codes 2. violated codes by manipulating the prices of publicly traded securities 3. violated codes by failing to disclose the transactions to clients befor they occurred. What do you think? P

1 he’s not manipulating the markets, and i don’t think that a hedge fund manager would have to disclose every single transaction before doing it, he’s trying to generate returns as said in fund strategy

yeah its 1, same reason as dsquared. Simple hedging strategy


AndrewUNH Wrote: ------------------------------------------------------- > yeah its 1, same reason as dsquared. Simple > hedging strategy Andrew, how is he hedging his risk? He is long in both cases on the stock, right? He is buying it in either case…

oh sorry i thought it said buying puts, which would be more sensible…maybe he’s an idiot and just wants to collect the premium and pray the stock doesn’t tank…

I presume that the manipulation of markets option refers to the fact that if the price of the underlying falls when he owns the short put he looses money, so he pumps money from the hedge fund into buying the underlying hoping that that will keep prices high enough so the owner of the put wont excercise?? Although I agree that the answer is 1. But… If the question was worded in a way that implied the hedge fund manager FIRST issued the puts, and THEN was worried that the stock might fall so decides to pump in money in an effort to keep the stock trading above excercise price, and then liquidates his long stock positions directly after the excercise date of the put, i would guess that everyone would agree the answer is 2???

This is definitely a weird question, I would say that because he is a CFA charterholder, he must abide by the stricter rule set forth by the Code of Standard and Ethics. I would believe it’s 3 because of the fact that he is a current CFA charterholder

I doubt it’s 3, because they are aware of the funds general strategy so it complies with Standard V B - which says that you must inform clients “about the basic process and logic behind an investment recommendation”… Having to clear every trade before you execute would be stupid and counter-productive.

you guys need to stop fighting over this and move on- the answer is 1 and it’s not that weird of a question.

AndrewUNH Wrote: ------------------------------------------------------- > you guys need to stop fighting over this and move > on- the answer is 1 and it’s not that weird of a > question. I agree with Andrew. It’s not that weird a question. Shorting is considered efficient for the market so even though you are shorting for manipulation of the price, you will be fine.

the answer is 3. The offence is in not informing the clients of this major inv. Being aware of the fund’s general strategy does not suffice on this occassion.

I remember this question from Shwesser and answer is 1 according to them, although it’s wierd strategy fund manager uses.

In fact I remember the answer being A. I can’t imagine if Schweser got it wrong. Omaojo, where did you see answer being C?

It’s definitely A. First, hedge fund managers don’t notify their clients of trades. In fact, in many hedge funds clients can’t find out about fund positions. Second, selling puts is a perfectly reasonable way of being bullish on a stock. As long as shorting puts is part of the disclosed investment strategy of the fund, there is nothing weird about this at all (the reason for shorting puts is that you can almost always be assured that realized vol will be less than implied vol so in some sense it’s nutty not to short puts).