NEW YORK (CNN/Money) - Mutual fund companies repeatedly allowed Wilshire Associates, the investment consulting firm, to engage in a rapid-fire trading strategy that netted the firm huge returns -- and came at a cost to the mutual funds' long-term investors, according to a report in the October issue of Money Magazine.

That revelation suggests that the mutual fund trading scandal may be even more widespread than already alleged in recent investigations initiated by New York State Attorney General Eliot Spitzer, according to Money's report.

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In a separate report, Time Magazine reports in its Sept. 29 issue that Spitzer's investigation may soon focus on trading of mutual funds by Millennium Partners, a $4 billion hedge fund run by Israel Englander. Sources told Time that Spitzer is looking into both late trading and market timing.

On Sept. 3 Spitzer filed a complaint accusing the hedge fund Canary Capital Partners of "late-day trading," the term for buying mutual fund shares at their closing price after the close of U.S. stock market trading at 4:00 p.m. ET. Spitzer also said Canary engaged in "market timing," rapid short-term trading that can lower returns for long-term investors. Spitzer alleged that four mutual fund firms assisted Canary: Banc One, Janus, Strong Financial and Bank of America Nations Funds.

Time did not identify which mutual funds Millennium was dealing with, and Englander declined comment.

Sources told Money that Wilshire typically traded more than $100 million worth of mutual funds (see full story). Money has not yet determined the names of any of the fund companies, though the funds usually had assets of $1 billion or more, suggesting that some of the biggest firms in the industry may have been involved.

Wilshire began using this trading strategy roughly a decade ago, according to sources cited in the magazine report, under the guidance of the firm founder and former NASA engineer Dennis Tito (who famously paid a reported $20 million to fly into space aboard a Russian Soyuz rocket in 2001).

According to Money sources, the fund trading was part of a complex hedging strategy, in which Wilshire would short-sell index futures based on benchmarks such as the Standard & Poor's 500 and the Russell 2000. Index futures are sometimes overpriced by a tiny fraction, and when that occurred, Tito would bet that their prices would fall -- virtually a sure thing, since ultimately the prices of the futures and the underlying index should converge.

At the same time, without paying any commissions, Tito could buy a bundle of mutual funds whose stockholdings closely resembled the makeup of the market index, the magazine reported.

With this hedge, Tito locked in a tiny gain, nearly risk-free, as the prices of the futures and the index converged at the 4 p.m. market close, according to the magazine's report. Annual returns are said to have exceeded 100 percent. Wilshire would hang onto the mutual funds for only a few days at a time, sometimes for as little as 24 hours.

Wilshire quietly ceased its fund-hedging strategy in early 2002.

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In response to inquiries from Money, Wilshire Associates spokeswoman Kim Shepherd told the magazine the firm "has always completely and fully complied with all rules and regulations covering our industry. All trading fell within the parameters set out by regulators."

Market timing is publicly discouraged by fund companies, and many charge individual investors redemption fees for such short-term trades.

The practice increases trading costs, which reduces returns. It also forces fund managers to either keep extra cash on hand or sell holdings prematurely to meet redemptions. Both lower a fund's gains in a rising market, and selling holdings can create a capital gains tax bill for long-term shareholders.

The Wilshire case raises other questions, Money noted. In addition to managing the Wilshire 5000 index, Wilshire is in the business of helping large institutional clients select investment managers. The big question: Was it a conflict of interest for fund companies -- who knew that Wilshire might (or might not) recommend them when its clients searched for money managers -- to make special allowances for Wilshire by permitting the rapid trading?