Overview: Several academic studies have shown hedge funds to be poor investment choices for prudent investors. Now, several scandals have added to the evidence on this being a poor asset choice.

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The investing world was rocked with the news of another hedge fund scandal, as Galleon Group founder Raj Rajaratnam was arrested with five others in an insider trading scandal. The news refreshed the not-too-distant memories of the Bernard Madoff and R. Allen Stanford scandals and thrust hedge funds back into the spotlight. It also serves as another example of why investors are best served by avoiding these investment vehicles altogether.

 

On October 16, 2009, Rajaratnam was charged with securities fraud and conspiracy to commit securities fraud. The SEC also issued civil charges of insider trading against Rajaratnam and the other five people implicated in the scandal, including a high-ranking official at IBM.¹

 

Rajaratnam’s firm Galleon Group was considered an exceptional performer, recording average annual returns of 21 percent per year for its largest fund. The firm eventually oversaw more than $7 billion in assets before withdrawals reduced its level last year and still managed $3.7 billion at the time of the arrest.² Less than a week later, the firm announced it would liquidate all its hedge funds.³

 

Rajaratnam’s arrest was just one of a number of recent high-profile scandals involving hedge funds. The Madoff and Stanford cases have been well documented. Madoff was sentenced to 150 years in prison for running a $13 billion Ponzi scheme which ensnared a staggering number of people, including high-profile investors such as actor John Malkovich and baseball hall-of-famer Sandy Koufax.⁴ Stanford is awaiting trial on charges of leading a $7 billion investor fraud.⁵ The following are other hedge fund scandals that have erupted in the past year.