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The government’s crackdown on insider trading at hedge funds may actually be benefiting one fund at the centre of the probe—SAC Capital.The investigations have resulted in the ruin of several hedge funds.
Raj Rajaratnam’s Galleon Group, which controlled $7 billion at its height, is long gone. Level Global, a $4 billion hedge fund in New York that federal agents raided in November 2010, announced the following February that it would wind down.
The much smaller Barai Capital and Loch Capital, also raided in November 2010, liquidated around the same time. And on Thursday, Diamondback Capital—which once held at least $2 billion of investor funds— announced it would also unwind.
The larger funds—Galleon, Level Global, Diamondback—could be considered competitors or potential competitors of SAC Capital. They competed with SAC for investor capital and in aggressive trading positions. They also competed for personnel, each hoping to hire the best traders and analysts for themselves.
Much of this competition was somewhat one-sided, of course. SAC doesn’t need more capital—although it does need to defend against attempts by other funds to lure away investors. SAC reputation as a trading powerhouse is so great that if it decides to hire a trader, other firms have trouble making competitive offers.
But even if they weren’t exactly poised to go up against SAC directly, they were potential competitors. And inside of SAC, traders often informally bench marked their own performance (as well as their compensation) not just against internal goals but against how traders at other firms were doing, according to people familiar with the matter.
It’s ironic that one unintended consequence of the government’s insider trading probe has been to take out SAC’s competition. It has fewer funds to worry about competing for capital and personnel.
Maybe Steve Cohen, the founder of SAC, should send the FBI and the SEC a thank you note.