Hedge funds absolutely manipulate stock prices.

• Position: YOUR LIFE

Some hedge funds manipulate stock prices at the end of the month to improve the returns that they report to their investors, relates a study published in the Journal of Finance. In a study of 10 years of hedge fund data, researchers found evidence that some funds run up prices on specific stocks they hold on the last day of the month and quarter--especially the last 20 minutes of trading--before they report their returns for the period, but the prices usually fall back the next day, after the abnormally large returns have already been reported to investors.

"Some hedge funds that de this are trying to make themselves look more successful than they really are," explains Itzhak Ben-David, coauthor of the study. "What this means is that investors could be getting the wrong messages about the quality of the hedge fund. They're not getting a clear picture of how the fund is doing,"

Called "portfolio pumping," the practice is economically significant. The study found that stocks that have the most hedge fund ownership (in the top 25%) see, on average, an abnormal return of 0.30% on the last day of the quarter, most of which reverts back the very next day of trading. In the past, some mutual funds engaged in portfolio pumping. The Securities...