The regulatory compliance sessions often aren’t subtle, according to hedge-fund employees who’ve attended them. Presentations may include run-downs of the number of insider- traders in prison, photos of white-collar perp walks and snippets of wiretap recordings.
New Crimes
Some of the changes are the products of post-fiscal crisis regulations requiring hedge funds to register with the SEC and create written policies on everything from valuing holdings to employees’ trading in personal accounts. In any event, the funds don’t get a lot of credit for all the care they’re taking to obey the rules. “People aren’t suddenly going to find Jesus,” said James Cox, a professor at Duke University School of Law. “It’s just that in certain eras we put more resources in trying to catch individuals,” and that’s a deterrent.
Bad apples will always come up with new ways to commit crimes, such as using computer hackers to access non-public information. “As time passes and memories fade, there will always be some who think they can engage in activities they should know will come back to haunt them,” said former SEC Chairman Harvey Pitt.
The feds haven’t pulled up stakes, though most cases growing out of the probes that started around 2007 -- dubbed Perfect Hedge and Matchmaker -- have ended. The government won 80 convictions. SAC agreed to pay a record $1.8 billion in 2013 to resolve a criminal case that alleged six people engaged in insider trading while working there. The SEC accused Cohen of failing to properly supervise a portfolio manager who’s now in prison. At the time, enforcement officials sought a lifetime ban on Cohen running a hedge fund, according to people with knowledge of the situation.
Instead, the SEC made the two-year deal, widely viewed as a victory for the founder of a firm that U.S. Attorney Preet Bharara called a “magnet for market cheaters.” (Cohen in 2014 converted SAC into a family office called Point72 Asset Management LLP, and the SEC insisted its supervision of that firm be part of the settlement, according to a person familiar with the matter.)
It’s not clear whether the crackdown was a factor in stock- picking hedge funds’ lackluster returns in recent years. After Rajaratnam’s arrest, those funds gained about 31 percent through the end of last year, trailing the 83 percent jump for the Standard & Poor’s 500 Index, according to Hedge Fund Research Inc. Equity-focused funds rose 137 percent in the decade before authorities raided Rajaratnam’s firm, compared with a 14 percent S&P decline. The reversal of fortune has drawn questions about whether hedge funds are worth their fees -- typically 2 percent of assets under management and 20 percent of investment gains.
One manager who has defied the hedge-fund slump is Cohen. In 2015, when stock funds, on average, made no money, his Point72 was up 15.5 percent, after operating expenses. In 2018, investors may get a chance to put money with him again.