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September 10, 2007

Market Turmoil Brings Opportunity

By Michael Scotti

The avalanche of sell orders hitting buyside desks during the market rout was a bit smaller than it otherwise might have been.

For about a dozen mutual fund companies, a new service called ReFlow came to their rescue and bought out the funds' shareholders looking to redeem their shares. That reduced the number of equity shares the desks had to dump into the marketplace.

"We're a small player who has the potential to change the way the market executes [mutual fund] transactions," says Alan Seigerman, ReFlow's chief operating officer.

Reflow bought between $100 million and $200 million in fund shares last month. Some of its 12 clients saw outflows of as much as 3 percent of their assets. To be sure, ReFlow's concept isn't good news for the brokerage industry, as inflows and outflows account for about 30 percent of all trading at mutual funds, Seigerman says, citing industry statistics.

ReFlow is essentially a redemption service. It buys the outflows of mutual funds and looks to sell them back at a higher price later on. There is a fee of 15 basis points for ReFlow's capital. The firm believes that taking the other side of retail investors' sell orders is a good business, as mutual fund holders are notoriously poor at timing the market. Mutual funds also benefit by avoiding the costs of trading stocks individually-no commissions, no market impact, no time spent trading. The fund is obligated to buy back the shares within 28 days, but about 90 percent of the time that has already happened, Seigerman says.

In the meantime, another handful of fund families are ready to sign up, joining the likes of Oppenheimer Funds, Bridgeway Funds and Nicholas-Applegate.

ReFlow is funded by a group of private investors, ReFlow Funds, who are essentially "arbitraging the cost of liquidity in the marketplace," Seigerman says. ReFlow is currently operating in the red, but Seigerman thinks the firm will be profitable in two years. To earn a profit would require having between $500 million and $1 billion working in the marketplace each day, Seigerman adds.