Following FBI Probe, Pensions Keep Watchful Eye on Investments

(December 6, 2010) — Following the probe by the US Federal Bureau of Investigation into insider trading, pension funds around the country have been keeping a closer eye on their investments while rethinking risk controls.

Last month, three hedge funds were raided as part of a probe by the FBI, the Manhattan US Attorney’s office, and the Securities and Exchange Commission. One scheme impacted is the Missouri State Employees Retirement System, or MOSERS, which has $104 million — 1.4% of its $7.4 billion portfolio — invested with Diamondback Capital Management LLC, one of the fund’s under investigation. According to the St. Louis Post-Dispatch, MOSERS additionally has an indirect investment of $1.5 million in Level Global Investors LP, another firm under investigation managed by Blackstone Alternative Asset Management, MOSERS’ hedge fund consultant.

“Although the firm is currently managing approximately $5 billion, it is possible that a material number of redemptions could lead to downsizing and thus less favorable risk-adjusted returns for the remaining investors,” Tricia Scrivner, manager of the system’s hedge fund investments, told the newspaper. Yet, she added that Diamondback, which manages money for numerous other pensions, is continuing to manage its business as usual.

Many analysts believe the FBI-led probe draws attention to the risk controls that fund managers have integrated when dealing with third-party research providers, and the investigation may encourage them to heighten their standards. ” I think the most important control is for senior executives to clearly communicate to employees that 1) insider trading is not tolerated; and 2) employees have an affirmative duty to escalate their receipt of information that is even potentially material and non-public,” Joshua E. Broaded, principal consultant at ACA Compliance Group, told aiCIO. “Advisers that use expert matching services, or that have other types of potential exposure to inside information, should think carefully about how they can demonstrate a good corporate culture and an appropriate set of proactive controls,” he said.