It happens every year, not necessarily as autumn arrives. Actually, it usually happens as winter arrives. The months of November-December are marked by a seasonal phenomenon, a necessary evil sweeping through the capital market: polishing returns for year-end.

December 2005 brimmed with touch-ups. The year 2005 had been a boom one for stocks, and in boom years one always feels like a makeover. The leading indices gained about 10% and bonds returned between 3% to 5%, assuring industrious touch-ups to come. Just wait for the wave of publicly traded companies to start selling shares, and mainly, bonds not registered for trade. That is the signal that the painters are working overtime.

A decade ago, when institutional investors were fighting each other tooth and nail to gussy up their annual returns at the last second, they simply raised and lowered share prices.

Since then, that tawdry manipulation, which carried the risk of criminal charges, has gone out of fashion. Today's touch-ups are much more sophisticated. Wars are fought that only market insiders even know about, since most of them take place outside the market, in paper not registered for trade and in corporate bonds that use highly sophisticated pricing mechanisms, mechanisms that determine how to price a non-negotiable bond that necessarily has no market price, by the yields of the provident fund and/or pension fund and /or insurance company holding it.

The capital market commissioner, Yadin Antebi, determined a pricing mechanism, via the Ribit corporation. His mechanism has its advantages, and disadvantages. One of the disadvantages - the mechanism allows the entire anticipated profit over years, from the purchase of a non-negotiable bond, to be recorded on a single occasion.

Therefore, if Shaarei Ribit rules that a particular non-negotiable bond is worth x amount of money, and in parallel a comparable bond publicly issued by the same company is trading lower, the bond buyer can record his entire profit from the price gap on the day of purchase. If the bond in question was bought years before, the profit over the years can accrue to a far higher amount. There have been cases of issues like this, which generated a 20% profit on the day of purchase.

A 20% profit in a day is a great deal of money. It is enough money for enough institutionals to succumb to the temptation, to buy similar bonds at such offerings, merely because of an immediate gain. The temptation becomes all the more irresistible in the weeks before year-end, when any addition to returns can boost the investment firm to No. 1 of the year in the lists, or at least higher.

There is a price for this overnight gain. The firm gets to book the profit, and is then stuck with the bond in its paws for profit-free years. It improves the books today, at the expense of future returns.

The problem would have been less painful if the investors in question, who gain today and lose it back over years, but the thing is ? in part, the Helen causing the annual war over returns is new investors. The investment firms are beautifying their year-end results as a means to recruit fresh money. Therefore, the immediate gains benefit to investors who had come on board previously, but not the new ones.

Therefore, this last-minute dash to pretty the figures is a clever marketing mechanism by the institutional investors. But it is an unfair one that is to the detriment of investors.

The problem is that the mechanism works over years, mainly among small institutional investors. A small body that raised a lot of money based on ramped-up returns achieved in the past can stop worrying: the big money coming in dilutes the dubious investments, so if they generate a loss, it will be negligible. Therefore, fast-growing small investment firms may use this mechanism almost without fear.

That also may help explain the high returns presented over the years by smaller provident funds and pension funds, mainly the ones run by private brokerages.

The big institutional investors, the big insurance companies, provident funds that the insurance companies bought from the banks, which are too big to patch up their returns, stand helplessly by, grinding their teeth. As long as a quick buck is there to be made from non-negotiable securities, and as long as the institutional investors aren't forced to publish their risks alongside their returns, the year-end ritual of spit-polishing returns is probably inevitable.