Managed futures and the world of hedge funds have a love hate relationship. On one hand, lumping managed futures in with hedge funds can make it easier for investors to understand the general idea behind a managed futures investment. Inclusion in hedge fund analysis can get managed futures programs greater exposure. That being said, there are some pretty major distinctions between hedge funds and managed futures investments (which we’ve covered again and again) which, when overlooked, can give managed futures a bad rap.
A great example of this can be found in SAC’s current meltdown in investor confidence. As FINAlternatives explained:
Under an insider-trading cloud, SAC Capital Advisors expects clients to redeem at least $1 billion next month.
The $14 billion Stamford, Conn.-based hedge fund giant has been mentioning the figure in talks with advisers and top employees, The Wall Street Journal reports. Withdrawals of that amount would account for one-sixth of outside capital invested with SAC.
While damaging, the redemptions of that size would not have too much of an impact on SAC. More than half of the money it manages—$8 billion—belongs to founder Steven Cohen and employees of the firm. In addition, clients can withdraw only 25% of their assets each quarter, meaning it will take a year to pull all $1 billion.
This short excerpt highlights many of the problems with a hedge fund investment. Insider trading? Not possible in futures trading. Redemptions raising questions about ability of a strategy to continue, without impact? Not a concern, as the managed account structure of a managed futures investment means your investment is never used to take out lines of credit or finance group trades; the account is in your name, and only used to facilitate your trades for your account. Having to wait a year to get out of a program? Not relevant; your managed futures investment would have daily liquidity.
That being said, is this a death knell for SAC? Probably not. The article itself admitted that until recently, the idea of pulling out of SAC was “laughable.” It’s an idea we’ve heard before, too; do investors really care if the rules are getting bent a bit, as long as they’re getting their money?
That might have been an accurate characterization in the past, but perhaps we’re getting to a point where investors are drawing a line in the sand, even when the investments are profitable. After all, the consequences are mounting rapidly:
But it has become clear that federal investigators are targeting SAC in their insider-trading investigation; eight current or former employees have been charged in the current crackdown, with others named in Securities and Exchange Commission lawsuits or as unindicted co-conspirators in criminal cases. Most recently, former portfolio manager Mathew Martoma was arrested and charged with insider-trading; authorities have reportedly sought his assistance—unsuccessfully—in building a case against Cohen. In addition, the SEC has informed SAC that it is likely to bring an enforcement action against the hedge fund.
Who knows what will come next. Maybe the Feds will finally make their (long sought after) case against Cohen, or maybe the fund will continue unfettered. Regardless, the unfortunate case of SAC does a good job of highlighting many of the structural risks associated with hedge funds. Look before you leap- not all alternatives are cut from the same cloth.