By Michelle Celarier
What are the lessons to be drawn from Raj Rajaratnam’s arrest on insider trading charges? Perhaps it’s just a matter of “a few bad apples,” as one manager characterizes the disturbing charges against Galleon Group’s founder and what appears to be a growing circle around him.
But it’s not good for the industry when people start asking the obvious question: With so many smart guys in the room, is the only way to get an edge—or alpha if you prefer—through illegal activities?
The revelations from Rajaratnam’s arrest seem to say that connections and access—whether illegal or not—are all that matters when investing in tech, and there were plenty of scandals reinforcing that assumption when the tech bubble burst. However, this month’s Niche Player profile, of Harvest Small Cap Partners’ Jeff Osher, shows another, less controversial, way to play the tech game.
One major concern for hedge funds has to be that investors, burnt last year by losses, redemption suspensions, side pockets and of course the Madoff scandal, are finally doing some due diligence and are looking for any reason not to invest in a manager—rather than the other way around.
Take the beating Harbinger Capital Management’s Phil Falcone, the subject of this month’s cover story, took when he lost 29% in 2008—after being one of 2007’s stars with a 119% return, based largely on his bet against the housing market. Investors now criticize him for straying from his roots and gripe that the subprime short wasn’t his idea after all. Perhaps fame did go to his head a bit, but Falcone’s hard landing could make him an even better manager going forward. He’s already proving he can come back with this year’s returns.
This month AR is also looking at a number of star managers who blew up last year—including Jeff Gendell and Dwight Anderson—and who are asking investors to give them a second chance. So far most of these guys have been able to raise a little money—but it’s far from the billions of dollars they managed at their peak.
Some have decided to reframe the problem. Instead of starting a new hedge fund after last year’s losses, a few called it quits and went long instead. Why not? Our In Depth feature finds this is a good way to avoid those risky shorts, earn hedge fund-like fees and typically avoid high-water marks—without asking institutional investors to get board approval to invest more money in hedge funds. But it’s still not hedged, is it?
Although the pullback of money from hedge funds seems to have bottomed out, and performance is on the upswing, the news this month indicates the industry still has a lot of reparation work to do.
