Money managers are seeing some immediate fallout from the high-profile
FBI raids of Wall Street firms in the past week — and that could create a buying opportunity.
“As soon as people hear there's a raid of some hedge fund, they indiscriminately start selling,” said Uri Landesman, president of Platinum Partners LP, a $500 million hedge fund shop.
Mr. Landesman, who said he has no details on the insider trading probes beyond published reports, assumed much of the recent FBI activity was an extension of the ongoing Galleon Group investigation.
While Mr. Landesman described the FBI raids as deliberately sensational to “try and grab headlines,” he said the lack of specific information has left a lot of investors assuming the worst.
Although hedge fund portfolios are closely guarded, Mr. Landesman said investors will access public filings, shareholder letters and published reports to try to determine which stocks are likely to be hurt in the event of a hedge fund liquidation.
“The FBI will always do this kind of thing in as public a manner as possible because they don't care about the impact on the fund,” he said. “And investors assume that if there's smoke there's fire, and they start worrying about a non-orderly way to dispense of some positions.”
The result, which Mr. Landesman said his portfolio experienced on Monday, is stocks being sold based on nothing more than rumors and assumptions.
“It's annoying and I was impacted by it in a minor way yesterday,” he said. “It might be a buying opportunity.”
In terms of the details of the ongoing probe, former hedge fund manager Lars Kroijer said the latest investigation “seems to be operating in the grey zone that is less black-and-white that what Galleon was doing.”
Galleon Group, which closed in October 2009, was at the center of a $52 million insider trading investigation that resulted in charges against nearly two dozen people, including Galleon founder Raj Rajaratnam.
Mr. Kroijer, who voluntarily closed his $300 million his hedge fund, Holter Capital, in early 2008, wrote a book about his experiences: “Money Mavericks, Confessions of a Hedge Fund Manager” (Prentice-Hall, 2010).
“Insider trading is not always as easy to prove as some people think,” he said. “It raises questions regarding how close you can get to a company before it is considered insider knowledge.”
Ultimately, the knee-jerk reaction of some investors to sell stocks associated with the hedge funds and other asset management firms being investigated could create some opportunities, according to Mr. Landesman.
Diamondback Capital Management LLC, one of the three hedge funds raided by the FBI yesterday, has equity investments in over 700 companies, according to a regulatory filing. It owns fairly sizable stakes in, among others, energy companies (El Paso Corp, PPL Corp.) and financial services outfits (Citigroup Inc., State Street Corp. and Morgan Stanley).
“Just because the FBI showed up at a company like Diamondback doesn't mean they are going to have to sell all their shares,” he said. “This kind of activity impacts stock prices, but some investors will have the guts to step up and buy.”
