Could it be possible that mutual fund companies were simply outfoxed by hedge funds and other trading abusers? Paul Haaga, ICI chairman and executive vice president of Capital Research, thinks so.

In an interview with the LA Times, Haaga reflects on what went wrong and how fund companies could have prevented the scandals.

Fund companies did a good job of understanding the late trading risk from 401(k) investors, but neglected to consider the incentives that international arbitrageurs and hedge funds could realize from trading in mutual funds, said Haaga.

"What we didn't realize was that, with [stock-index] futures trading in some of the non-U.S. markets, that those things were sending such clear signals about the next day's [U.S.] markets," said Haaga.

"[W]e could have thought better about was hedge funds' investment in mutual funds. They don't need to have 'sure things' [in their trading] or make a lot of money on every trade. They just need to be doing it enough times, and putting down enough money, and they'll make money in the end. We didn't properly evaluate the attractiveness of [market-timing] to other people," he continued.

But what about the "bad apples" in the industry who realized these incentives were out there and capitalized on them?

"[T]he executives who cut these deals…I haven't searched their souls, but I think some of them may have been more stupid than venal," Haaga told the LA Times. 

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