There is a fine line between what can be considered insider trading and what are simply the everyday risks of executing certain hedge fund strategies, Israel “Izzy” Englander, founder and CEO of Millennium Partners, told attendees at the 2009 Absolute Return Symposium.
“It’s something investors really need to come to grips with; it’s just part of being in that business,” Englander said. Insider trading can be spotted easily in strategies such as fixed income and statistical arbitrage. “Unfortunately, in some strategies it’s a fine line. When it comes to long/short equity I think you have to be very diligent,” said Englander.
From last year’s revelation of Madoff’s ponzi scheme to the recent blowup of Galleon Group, hedge fund investors are increasingly nervous about the firms they are investing in, Englander says it is clear that regulation of the hedge fund industry is necessary and unavoidable. But he believes regulators have so far been unsuccessful in the way they have approached their efforts to oversee the industry.
“Even though we are all competing with each other, no-one should compare us,” says Englander, noting that far too often regulators look at the fees fund managers charge investors as an indication of how much money they are making for themselves and whether or not their interests are aligned with those of their investors. Instead, he says regulators need to figure out a way to look beyond the face value of management fees that different firms charge to determine what percentage of those fees are actually necessary for a fund’s management and trading activities, and whether or not managers are invested alongside their investors in a significant way.
--Britt Erica Tunick