What is Doing the Reverse Desk
Doing the reverse desk is a slang term used by hedge fund traders to describe a practice intended to fool other traders into copying their trades. Typically, this is done by making small trades that may run directly counter to a fund’s trading activity and enthusiastically disclose these trades to the public through one of several possible channels.
BREAKING DOWN Doing the Reverse Desk
Doing the reverse desk describes one technique among many that hedge fund managers use to avoid falling victim to copycat trading. By making small trades opposed to the fund’s trading activity and disclosing them, the tactic aims to achieve two goals.
First, the manager does not want other investors to co-opt their proprietary trading strategies. Second, the manager wants to place trades at prices most advantageous to his fund. By “pumping” securities in a direction counter to their actual position, the manager may be able to drive the price a more favorable direction. If multiple funds are making the same decisions, the cost of those assets is likely to go up.
Rumors vs. Disclosure in the Hedge Fund Industry
Rumors can travel fast and informally in the world of hedge fund managers and those who follow them. Formal reporting often lags several months behind actual trading and can paint an incomplete picture. Managers can plant a misleading story with the right industry source and watch it spread quickly.
In comparison, the regulated disclosures that funds are required to make are relatively vague and help fund managers obscure the details of their portfolios and strategies. Hedge funds can spread their assets or sources of financing across various institutions, or employ special purpose entities (SPE) to hide assets that they would prefer not to expose to public scrutiny.
The most disclosure that does take place is voluntary and dictated by the demands of large investors or financial advisers who bring investors to the fund. If these groups insist, fund managers can reveal strategy, net asset value, a partial summary of positions held, or transaction records. Security and Exchange Commission (SEC) requirements, in contrast, do not go much further than forcing fund managers to register via SEC Form ADV and providing a quarterly summary of positions held. The light regulation allows for funds to employ deceptive competitive practices like doing the reverse desk.
In recent years, hedge funds have increasingly opened themselves to a broader cross-section of the investing public. Regulators would like them to improve transparency for this trend to continue. To that end, the 2013 JOBS Act loosened restrictions on the marketing of hedge funds. Fund managers have argued, and regulators hope, that shining a brighter light on fund activities will lead to higher transparency and less deception along this lines of doing the reverse desk.