Insider Trading Costs

The Cost of Insider Trading Investigations to Hedge Funds

The cost of coming under investigation for insider trading is enormous, even if the fund is not found guilty. The damage to the fund's reputation, the withdrawals and the loss of future commitments are major consequences. Three hedge funds learned this as an insider trading scandal cost them a combined $9 billion.

Level Global Investors has not disclosed the level of the redemption requests it received, but has announced it is closing and returning all of the $4 billion it manages in its funds to investors by the end of the quarter.

Diamondback Capital was hit by $1.3 billion of redemptions for the quarter ended March 31, about 17% of its $5.8 billion of assets under management. Diamondback Capital will remain open.

Executives of both long/short equity hedge fund managers have acknowledged their offices were searched by the FBI and are cooperating with Preet Bharara, the U.S. attorney for southern New York, in connection with an investigation into insider-trading tips that allegedly were passed to hedge fund managers by expert-network consulting firms. Charges have not been leveled against either firm, and executives at both firms said the government has confirmed they are not targets of the probe.
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