Raided hedge funds slammed by departures, outflows

NEW YORK Mon Nov 22, 2010 7:03pm EST

NEW YORK Nov 22 (Reuters) - The three hedge funds raided by U.S. authorities on Monday have faced investor outflows or seen some high profile staff departures in the past year.

The offices of Boston-based hedge fund Loch Capital Management and Connecticut-based funds Level Global Investors and Diamondback Capital Management LLC were searched on Monday in connection with a widening probe by U.S. officials into insider trading. [ID:nN22281945]

Lawyers familiar with the multi-pronged investigation said the government appears to be focusing on networks of traders and managers amid suspicions by authorities the funds traded on nonpublic information about stocks.

Two of the funds, Diamondback and Level Global, were started by alumni of powerhouse $12 billion hedge fund SAC Capital Advisors, whose manager Steven Cohen is famed for his ability to consistently beat the S&P 500, as well as his lavish art collection. Their offices in Stamford and Greenwich are each less than fifteen miles away from SAC's Stamford headquarters.

DIAMONDBACK

Diamondback, a multistrategy fund that oversees about $5 billion, has had difficulty since 2008 when the fund lost control of a huge portion of its capital in the Lehman bankruptcy. Lehman had been the fund's prime broker and maintained accounts on behalf of Diamondback. The fund has filed claims in the bankruptcy case for more than $800 million, according to court records. Last year, the fund was fined by the U.S. Securities and Exchange Commission for making short sales prior to public offerings by four companies.

Returns from the Diamondback Partners fund, have been inconsistent, according to reports in industry magazine Absolute Return, which said the fund was up about 25 percent in 2009, up 1.3 percent in 2008, up 19 percent in 2007, and up just 2.2 percent through April this year. Among its biggest stock holdings are El Paso Corp EP.N, Canadian Natural Resources Ltd (CNQ.N) and JPMorgan Chase & Co (JPM.N), according to securities filings.

The fund, however, has faced some high profile departures. Chad Loweth, one of the three co-founders left earlier this year, as did Larry Petrella, a top trader who decamped to Tudor Investment.

Diamondback's other founders, Larry Sapanski and Richard Schimel, who left SAC to launch the fund in 2005, remain at the helm.

Joelle Mevi, chief investment officer for the $10 billion New Mexico Public Employees Retirement Association, which has $42 million invested with Diamondback, said she is concerned about the report of an investigation involving the hedge fund, but is still waiting for more information.

"I don't think anyone likes to see newspaper headlines," said Mevi, whose retirement fund upped its commitment to Diamondback by $5 million this past summer.

She said that, once the pension fund's consulting firm, Cliffwater LLC, comes back with more on the investigation, she will make a recommendation to the retirement fund's board.

After their offices were visited by authorities on Monday, both Diamondback and Level Global said in statements they were fully cooperating with authorities and are still fully operational.

LEVEL GLOBAL AND LOCH

Level Global Investors, which uses a long-short strategy and now goes by the name Level Management LP, has offices in both Greenwich, Connecticut and Manhattan. Among its top holdings are Virgin Media Inc VMED.O, Monsanto Co (MON.N) and Apple Inc (AAPL.O).

The $3.5 billion fund was co-founded by ex-SAC employees David Ganek and Anthony Chiasson in 2003. Ganek and his wife Danielle live in a $19 million apartment in one of Park Avenue's toniest buildings and -- like Cohen himself -- are well-known modern art collectors. Ganek has been a member of the board of trustees of the Guggenheim museum in New York City since 2005, according to the museum's website.

But the firm has also seen some top-level departures in the past year, as its compliance chief, Taki Vasilakis, left for Morgan Stanley's (MS.N) FrontPoint Partners, and partner Jeffrey Messina joined Citadel Investment Group. FrontPoint has recently found itself entangled in another insider trading probe.

Reuters reported in January that investors had been fleeing tech-oriented Loch Capital, which at one time managed over $2 billion in assets, as close personal ties between its founders and a key witness in the Galleon insider trading case prompted investor redemptions. [ID:nN20170567]

The fund, which now oversees about $750 million, has its biggest positions in Apple, as well as Qualcomm Inc (QCOM.O) and Google Inc (GOOG.O), according to regulatory filings. (Reporting by Emily Chasan; additional reporting by Matthew Goldstein and Ross Kerber in Boston; editing by Andre Grenon)

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