Waddell & Reed and the flash crash hypocrisy

Halloween's only three weeks away and we have a brand new witch to hunt. By now, everyone has heard of Waddell & Reed and how the Kansas City mutual fund is reason du jour for the end of capitalism and further legalizing of market manipulation.

As the story goes, on the afternoon of May 6, 2010 an algorithm propelled sell-off of $4.1 billion of futures contracts linked to the S&P 500 sent the market reeling. As with all good witch hunts, Waddell hasn't officially been named, but via leakage that would make the BP oil spill seem tame in comparison, we have our new villain.

I can hear the sound of Blankfein's cheeks stretching into a grin. It sounds like press on nails on a chalkboard.

The fund's leading trader is named Michael Avery. Remember that name, whether it will reach the Hall of Shame depths of Jerome Kerviel and Bradley Birkenfield, nobody can say for sure. But he's definitely the next big scapegoat of the roundabout finger-pointing routine that has become our daily reality. Anybody seen Groundhog Day with Bill Murray, lately?

Good flick, reminds me of our financial news over the past year.

Waddell is being painted as "the mutual fund which traded like a hedge fund". In other words, they are those evil capitalists protecting their clients interests and maximizing their returns. The nerve of this slick Midwestern folk. Taking risk and then...hedging it!

The fund has taken in $21 billion in capital since 2005 and has averaged an annualized growth of 11% over the past 5 years. Now this is a bit of info which bares an interesting inference.

The words of Morningstar analyst Kevin McDevitt underscore a scary reality:

"Any time you are hedging you are cutting risk, but the way they do their hedging, the fact that they are putting hedges on and off quickly, means they are more tactical than most of these funds. It means they can get caught on the wrong side of the market. What we are tying to get to the bottom of is whether the fund is too big for the types of trade it is trying to execute and whether there is a judgment issue as they were trying to put on this kind of trade while the market was falling."

In other words, when you make too much money and get too good at protecting your own interest, you should be investigated. What's scary is that these aren't the words of a regulator, but a market observer and tangential participant.

I see nothing wrong with what Waddell & Reed did on May 6th. They traded. They saw movement in markets and reacted. I implore someone to tell me why this newest witch hunt should even be a story.

Let alone the one gathering all the headlines and attention.