SAC Capital's success raised red flag


Over the past few years, conventional wisdom in the hedge fund industry has been that limited investors are wielding more influence, and increasingly want to see strong compliance measures.

If you can't demonstrate solid risk management controls and processes, you end up "off the shelf," meaning investors won't consider you for investment purposes. But is it possible that such thinking is a little overblown? Is a little too much credit being given to limited partners? 

I raise the issue as the SAC Capital insider trading investigation continues to unfold. Twelve former employees have been implicated in some form of insider trading scandal, though neither SAC Capital founder Steven Cohen nor the firm has been charged. Some would argue that if the government secures cooperation from accused insider trader and former SAC Capital manager Mathew Martoma, the chances of charges against the firm go much higher.

In any case, should all the investigatory smoke be a warning sign for SAC Capital investors?

"Astonishingly, investors don't seem to mind terribly," notes ProPublica.

They added as much as $1.6 billion in new capital to SAC's flagship fund from 2010 to the end of 2011, when the insider trading investigation was in full bloom, according to Absolute Return data. Some big institutions have been rethinking their investments, and we may see some decide to exit. But there certainly hasn't been a flood.

Perhaps this owes to the unusually successful investing record at SAC Capital. But now, Cohen's unusual success has raised some red flags.

"You have to wonder whether his returns have been generated not only through his trading brilliance but also through a culture of cutting corners and pushing employees to the point where they break the law. In the United States, you are innocent until proved guilty, and nowhere can that be seen more than for a man who can generate amazing investment returns."

This saga is far from over.

For more:
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