Sunday, October 12, 2014

Inside A Criminal Hedge Fund

This article (via Manan Shukla) in The New Yorker describes one of the schemes that was used by the SAC hedge fund to earn hundreds of millions on a trade that was based upon insider information.  Investors in the hedge fund were able to get a rate of return on their investment that exceeded the market of rate of return because SAC had an "information edge" on other investors.  The focus of the article is on one of the traders that cultivated a relationship with an insider that enabled SAC to capitalize on the information.  He had a record of doing unethical and illegal things to get ahead.  SAC actively recruited traders with that kind of motivation.  Moreover, it had a system that enabled the head of the firm to deny responsibility for the behavior of its traders.  The trader, in this story, ended up in jail, but head of the firm was protected from prosecution by a carefully crafted system that made it possible for him to deny participation in the fraud.

SAC was eventually put out of business but the head of the firm accumulated $9 billion.  He actively trades his own funds in a business organized for that purpose.  Whether and how he might gain a "black edge" that enables him to achieve an above market rate of return is unknown.  However,  there will always be a suspicion that he does not beat the market with genius.  Gaining an information edge is an attribute of the business that he is in.  It is hard to determine whether a "black edge" or a legal edge provides the advantage required to beat other investors in a trade.

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