A Case Study in the Structural Risks of Hedge Fund Investing

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.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.