Hedge funds are actively managed investment institutions and the largest of which often command assets worth billions of dollars. Once used to ‘hedge’ money against the market, nowadays hedge funds cater almost exclusively to the rich and wealthy and command extraordinary fees. With a conflux of power and money, it is not surprising that scandals often rock large hedge funds.
Madoff Investment Scandal, 2008
One of the most infamous hedge fund scandals, former NASDAQ Chairman Bernie Madoff established Bernard L Madoff Investment Securities, LLC and ran a sophisticated Ponzi scheme through the hedge fund. Madoff in December 2008 admitted that his wealth management business was a multi-billion dollar Ponzi scheme. He was sentenced to 150 years in prison in June 2009 for defrauding an estimated $65 billion of investors’ money.
SAC Capital, 2010
Run by Steve Cohen, the hedge fund once commanded $50 billion in assets under management (AUM). A series of raids in its Connecticut and New York City offices were conducted in 2010 by the US Securities and Exchange Commission (SEC) as a part of an insider trading investigation. Eight employees were convicted in 2013 for insider trading.
The Galleon Group, 2009
Founded and run by Raj Rajaratnam, the firm had shut down after Rajaratnam and Rajat Gupta were convicted for insider trading. The investigation by SEC revealed other traders engaging in similar activities and 50 people were convicted or pleaded guilty in connection with the insider trading.
Tiger Funds, 2000
Founded by Julian Robertson, the company wasn’t rocked by any scandal or crime but imploded as a result of a few bad bets. Robertson was pulling big bets on tech stocks while shorting underperforming tech companies. But after the big dot.com bubble burst, Robertson’s strategy failed when tech stocks somehow continued to rally, leading to massive losses.
Robertson would have to shut the doors at Tiger Funds in 2000, and would later mentor John Griffin of Blue Ridge Capital, Ole Andreas Halvorsen of Viking Global, Chase Coleman of Tiger Global Management and Steve Mandel, formerly of Lone Pine Capital.
Pequot Capital, 2009
Founded by Arthur J Samberg in 1998, Pequot Capital managed about $15 billion in 2001 at its peak with an annualised average return of 16.8 percent. In May 2009, the hedge fund shut its $3-billion fund amid the proceeding of a government probe into insider trading. The SEC fined Pequot and Samberg $28 million for insider trading in 2010.
Amaranth Advisors, 2006
Amaranth witnessed a meteoric five-year rise to reach a peak of $9 billion of assets in 2005 with annualised returns of 86 percent. However, the streak of good luck was short-lived. The fund, founded by Nicholas Maounis in 2000, shut down after losing billions in assets within weeks in 2006. It made a delta hedge transaction on natural gas future derivatives which cost the firm roughly $6.5 billion.
Long-Term Capital Management, 1998
Founded by John Meriwether in 1994, Long-Term Capital Management reached its zenith between 1994 and 1998. In the first four years of trading, Long-Term Capital Management posted annualised returns of over 40 percent and held nearly $120 billion in trading liabilities.
However, the hedge fund’s highly leveraged trading strategies almost led to a global financial crisis in 1998. To prevent a systemic failure, a consortium of banks and finally the US Federal Reserve bailed out Long-Term Capital Management in September 1998. It was finally closed in 2000.
(Edited by : Thomas Abraham)
First Published: Nov 6, 2021 2:25 PM IST
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