Hedge funds involved in an investigation into insider trading — even if their actions are found to be 100% above board — are guilty by association says the head of a fund of hedge funds, a firm that invests in several hedge funds.
Take Level Global for example. The fund was raided, but no one from the firm has been charged with wrongdoing. Regardless, the fund is shutting down.
A fund of funds man told the Financial Times, “If I get even a whiff of an investigation, I want to get out before the next guy, especially if I know they have illiquid stuff or I don’t know what they have.”
Many people would probably agree with him about the funds that have been raided.
Another hedge fund investor, Brad Alford, head of Alpha Capital Management LLC in Atlanta, told Bloomberg: “When the feds knock on your door, it’s game over.”
“Integrity is all you have in this business.”
What’s interesting about their opinions is that it applies not just to the funds that have had search warrants out on them, but to funds that have just been subpoenaed, too. Even if they haven’t done anything wrong, apparently investors believe they’re tainted.
A lawyer who advises hedge funds explains why to Bloomberg: “If there’s a fear that the people who are responsible for generating the returns are in big trouble, even if there’s no substance to those allegations, the uncertainty can drive investors away,” said Mitch Nichter.
The one exception: SAC Capital. So far at least.
Most people probably consider SAC Capital, billionaire hedge fund manager Steve Cohen’s shop, to be the one fund that is somewhat involved in the latest investigation yet is untouchable even though the fund recently received a subpoena for information from the FBI, and more than one former employee has been arrested.
In fact, a number of the hedge funds subpoenaed and a few that have been investigated, like Trivium and Level Global, are SAC cubs.
SAC alums who have received subpoenas:
- David Ganek’s and Anthony Chiasson’sLevel Global. Both men are SAC alums, and Level Global has already been raided.
- Rich Schimel’s, Lawrence Sapanski’s, and Chad Loweth’s Diamondback. Schimel is Cohen’s brother in law. All men are SAC alums.
- Richard Grodin of Stratix Asset Management, and later, Quadrum, has received a subpoena, according to BusinessWeek. (Stratix and Quadrum are now bothclosed.)
- Richard Choo-Beng Lee – the co-founder of Spherix Capital has pleaded guilty and is cooperating with prosecutors in its probe of the Galleon Group hedge fund, according to BusinessWeek.
Here are a few examples of alums who have not received subpoenas:
- Abe and Jack Eisenstadt’s Dabroes (equity trading) – yes they are brothers and yes, that’s what Dabroes means.
- Ping Jiang’s Ping Capital Management
- Brian Cohn’s Archeroak Capital Management. The fund is still in the early stages – it hasn’t even started trading yet.
- John Liu’s Han Capital Management.
- Christopher Zepf’s and Brian Thonn’s Maiden Kingdom Ridge Capital. Read more about the fund by clicking here.
- Julie Macklowe’s Macklowe Asset Management. (Now closed and also, it’s highly unlikely because she’s not taken entirely seriously.)
- Michael Keohane is co-manager of Bourgeon Capital Management’s hedge fund, and was an analyst at SAC where he “co-managed a $125 million long/short equity Long/Short Equity A hedge fund strategy that involves buying certain stocks long and selling others short. There usually isn’t a restriction on the country that the stocks trade in either. ….. Click the link for more information. hedge fund portfolio.”
So why is SAC untouchable? The question doesn’t have an answer right now.
But Cohen’s returns are so good and he’s such a legend that people seem to assume he’ll be fine.
You might into consideration what a former SAC Capital trader told us last year, “the trading floor at SAC is the cleanest in the biz.”
Takeaway: the consensus is SAC will be fine, everyone else involved is screwed.