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Chapter 11. The Retail Investor: Victim ... > Momentum Investors in Disguise

Momentum Investors in Disguise

Why didn't the large mutual funds use their buying power with the investment banks to protect, rather than endanger, retail customers? They certainly have the power. Single large mutual funds can shut down the trading floor of a major investment bank by ceasing to buy for a time. But there is no evidence that mutual funds used their power to defend investors—they used it only to increase the fund's allocation of hot IPO shares.

In effect, mutual funds mimicked the behavior of venture firms. They recognized that investment banks, pushed by venture firms, were taking companies public at a very early stage. Companies were coming to market with no track record, no profitability, and mutual fund managers knew this—they're professionals, with experience assessing just these things—yet they decided to buy the stock. When stocks like these entered the portfolio of a mutual fund, and were not merely flipped, then the fund manager was essentially becoming a venture fund—investing in companies at an early stage of their development. Many mutual fund managers seemed to think, “Being a venture capitalist is easy, and has great returns. I want to do it too.” So mutual fund managers took their often unsuspecting investors into venture capital with all its risks and uncertainties.


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