Major hedge funds blow ups: A short list

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Hedge funds manage an estimated $3 trillion in assets worldwide. Their hedging strategies minimize the downside risk. But there isn’t always a hedge against greed, shady accounting practices, or ego of certain individuals. Over the last several decades, investors have seen hundreds of hedge funds blow up for one reason or another. Here we take a look at some major hedge fund blow ups – in no particular order – that shocked the regulators and wiped out billions of dollars of investors’ hard-earned money.

This post is a follow-up to our ‘Top 10 biggest hedge fund blow ups of all time.’ There have been so many big-ticket blow ups that it’s difficult to stop at just ten. Also, we missed some hedge funds in our first list that deserve to be named. A big shout out to our readers James Mitchell and others for pointing out their names.

Bernard L. Madoff Investment Securities LLC

Bernie Madoff’s investment firm defrauded investors of roughly $65 billion in one of the biggest Ponzi schemes of all time. Madoff’s investment firm was not exactly a hedge fund, but he had attracted billions of dollars from hedge funds and other investors. He claimed that he was generating gargantuan returns year after year using the split-strike conversion strategy.

Madoff was using a single bank account to deposit funds from new clients and to pay existing clients who wanted to redeem. The fresh money coming from new investors was presented as returns to existing investors. But he couldn’t run his Ponzi scheme any longer when the markets crashed in 2008. His sons reported him to the SEC. Madoff was sentenced to 150 years in prison.

SAC Capital Advisors

If you have watched Showtime’s hit series Billions, you might be familiar with billionaire Steven A. Cohen‘s story. The show is loosely based on Cohen. SAC Capital Advisors was one of the world’s largest hedge funds in terms of assets. The SEC had been investigating SAC and its traders for years. The regulators launched an insider trading investigation in 2010.

Many of its former and current traders were charged with insider trading and securities fraud between 2010 and 2013. In 2013, the hedge fund pleaded guilty of insider trading charges and agreed to pay $1.2 billion in penalties. As part of the settlement, Cohen was barred from managing outside money for two years. SAC never blew up per-say, but due to it being shut because of the above, we decided to include the fund in the list.

Cohen launched the Point72 Asset Management family office in 2014, which started accepting outside capital in 2018.

Galleon Group

Run by Raj Rajaratnam, Galleon was managing as much as $7 billion in assets. In 2009, Rajaratnam and five others were charged with multiple counts of insider trading and fraud. The massive insider trading scandal involved not only Rajaratnam but also senior executives at New Castle Funds and tech giants such as IBM.

Rajat Gupta, a former director at Goldman Sachs, tipped off Rajaratnam that Warren Buffet was going to make an investment in Goldman Sachs. Rajaratnam purchased Goldman Sachs shares before the market closed that day. Buffett’s Berkshire Hathaway announced the investment a few hours later. He sold the shares the next morning, reaping about $900,000 in profit. This was just one example of his insider trading activities.

In October 2011, Rajaratnam was found guilty on 14 charges and sentenced to 11 years in prison. At least four dozen employees of Galleon and other firms pleaded guilty or were convicted in that insider trading scandal.

New Castle Funds

The $1 billion New Castle Funds was the other part of the Galleon Group’s insider trading scandal. New Castle’s CEO Mark Kurland and consultant Danielle Chiesi were arrested in the insider trading case. Kurland was sentenced to two years and three months in prison. He was also ordered to forfeit the $900,000 he had earned from insider trades.

Danielle Chiesi had built several high-profile contacts at large corporations such as IBM, AMD, Akamai, and Sun Microsystems to obtain insider information. She shared the information with Kurland and other hedge fund managers including Galleon Group’s Raj Rajaratnam.

D.B. Zwirn & Co.

New York-based D.B. Zwirn & Co had about $5 billion in assets. In 2008, the hedge fund disclosed that it would shut down its Special Opportunities Fund and another offshore fund. The two funds together had about $4 billion in assets. The decision came after investors demanded more than $2 billion in withdrawals.

Investors rushed to redeem their money after the SEC launched an investigation into its accounting irregularities. The hedge fund’s founder Daniel Zwirn told clients that the fund was the “unfortunate victim of misconduct” by some former employees. Zwirn shut down the hedge fund in 2009 by selling the remaining assets to Fortress Investment Group.

Atticus Capital

Atticus Capital was an activist hedge fund giant with more than $20 billion in assets. It suffered a lost of more than $5 billion in 2008. The Atticus Global Fund plunged more than 25% while the Atticus European Fund lost about 33% in the first nine months of 2008. Its founder Tim Barakett was forced to shut down two of the three funds and return $3 billion to investors, which he said was solely for personal reasons.

Atticus had delivered an impressive performance before 2008. Barakett took home a staggering $675 million in 2006. He was making concentrated bets with little hedging, delivering stellar returns until the markets crashed and the fund blew up in 2008.

Bayou Hedge Fund Group

The Bayou Hedge Fund Group was launched by Samuel Israel in 1996. Israel managed to raise about $300 million from investors within months by promising them outlandish returns. The hedge fund performed poorly in 1998-1999. So, Israel and Bayou’s CFO Daniel Marino started lying about the fund’s returns to attract more money and keep existing investors happy.

In 2004, Bayou sent a letter to investors informing them that the fund had $450 million in assets. But Israel and Marino had stopped all trading and were using investors’ money to cover losses. Bayou withdrew all the left over money from its bank accounts, and was caught while wiring $100 million overseas. In September 2005, Israel pleaded guilty to defrauding investors. He was sentenced to 20 years in prison.

Pequot Capital

Art Samberg founded Pequot Capital in 1998. By 2001, it had attracted as much as $15 billion of investors’ money by delivering up to 17% annualized returns. It invested in public equity, private markets, venture capital, and other assets. In 2009, the SEC discovered that the hedge fund was engaged in insider trading activities. Samberg and Pequot were fined $28 million. The hedge fund was shut down in 2010.

The current market is hiding many more hedge fund blow ups in plain sight. Only time (and perhaps a brutal bear market) will tell which names will be added to this list.

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