Hedge Fund Manager Raj Rajaratnam: Guilty on All Counts of Insider Trading

In a high-profile case of insider trading, hedge fund manager Raj Rajaratnam has been found guilty on all 14 counts of securities fraud and conspiracy.

(May 11, 2011) — Raj Rajaratnam, the hedge-fund tycoon and co-founder of Galleon Group LLC at the heart of a US insider-trading investigation, has been found guilty of all counts against him.

The counts against him included nine of securities fraud and five of conspiracy to commit securities fraud.

After hearing the evidence that Rajaratnam participated in a seven-year conspiracy to trade on illegal tips from corporate executives, bankers, consultants, traders and directors of public companies, the Manhattan jury issued the guilty verdict.

The investigation is the result of a strong prosecution, Reuters reported, with FBI phone taps and testimony of three former friends and associates of Rajaratnam. Manhattan US Attorney Preet Bharara has indicated effort to crack down on insider-trading scandals.

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Rajaratnam faces a prison term of up to 25 years when he is sentenced by presiding US District Judge Richard Holwell. The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York.

This and other cases of alleged insider-trading on Wall Streethave pushed institutional investors around the country to keep a closer eye on their investments while rethinking risk controls. Many analysts believe the latest string of FBI-led probes over insider-trading 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 in December, after three hedge funds were raided the previous month as part of a probe by the FBI, the Manhattan US Attorney’s office, and the Securities and Exchange Commission. “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.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Study: Passive Beats Active During Rising Stock Markets

New research carried out by students at Uppsala University and reported by Affärsvärlden shows that if the stock market is on the upswing, then a passive management approach across a broader market index may be superior to an active approach.

(May 11, 2011) — Add Sweden to the list of markets where passive beats active, at least during times of rising stock markets, according to a new study by students at Uppsala University.

The research — conducted by Richard Widerståhl and Martin Jägerstad and reported by Affärsvärlden, a Stolkholm-based newspaper — analyzed how 36 actively managed Sweden funds performed against an index, comparing five separate periods in the years 1995-2010.

The study revealed that during periods when the stock market was on an upswing, actively-managed funds faced difficulty outperforming the index. However, during falling stock markets, actively-managed funds were more likely to outperform the index.

“With few exceptions the actively managed funds cannot sustain their performance compared to the index over the periods,” said Jägerstad, according to Global Pensions.

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The active versus passive debate has been a popular topic within the institutional investor world. Jibing with the Stolkholm-based study, Lee Partridge, San Diego County Employees Retirement Association’s (SDCERA) outsourced portfolio strategist and CIO at Salient Partners, offered a skeptical tone. “We think that it’s important to get all the different strategies represented in a well-diversified portfolio…but are you really trying to bring in the return premium that comes from those strategies, or do you think the manager has skill over and above the strategy?,” he told aiCIO. “We think that both can be operable, but we’re fairly skeptical about skill. We think that skill really has to be proven and it’s very difficult to detect.”

Nevertheless, the findings by Uppsala University — reiterated by Partridge — contrasts with recent results by the Ontario Teachers’ Pension Plan (Teachers’). In April, the fund’s chief investment officer Neil Petroff, riding a 14% annual return in 2010, claimed the fund’s active strategy added more than C$23 billion to the bottom line since its inception in 1990.

In a wide-ranging interview with Petroff, the CIO of Canada’s third-biggest retirement-fund manager claimed: “If we were a passive fund, we’d be C$23.2 billion lower in value, with liabilities at the same level. That really speaks to the value of active management – you add value when you pay for active management.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742