It’s no secret the SEC is cracking down on insider trading among hedge fund managers. Just ask Raj Rajaratnam and his friends, and Art Samberg, to name just two recent high-profile targets.
And, don’t forget that earlier this year the SEC created a task force that, among other areas, will target hedge funds and other alternative investment firms.
One area they could be looking at are the private loans made by hedge funds to small desperate companies. According to a new academic paper believed to be soon published in the Journal of Financial Economics, in 2005 alone, hedge funds and other institutional investors provided almost 50 percent of the $509 billion loans made in the “highly leveraged” segment of the syndicated loan market.
The authors assert that hedge funds are more likely to lend to highly leveraged, lower credit quality firms, where access to private information is potentially the most valuable and where trading on such information may lead to enhanced profits. Sure enough, the authors found “evidence consistent with the short-selling of the equity of the hedge fund borrowers prior to public announcements of both loan originations and loan amendments.” ....