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Economy

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Currencies

Asia markets tentative ahead of Opec meeting

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

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Banks

Barclays: life in the old dog yet

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Categorized | Financial

Cooperman’s travails rattle hedge funds


Posted on September 22, 2016

Billionaire hedge fund investor Leon Cooperman, left, is facing SEC charges of insider trading. Other recent high-profile probes have targeted Steven Cohen, who settled with the SEC, and Raj Rajaratnam, who was convicted©FT Graphic / Bloomberg, AP

Billionaire hedge fund investor Leon Cooperman, left, is facing SEC charges of insider trading. Other recent high-profile probes have targeted Steven Cohen, who settled with the SEC, and Raj Rajaratnam, who was convicted

In his trademark streetwise style, billionaire hedge fund manager Leon Cooperman came out swinging as he attempted to defend himself against insider trading allegations levelled at him by the Securities and Exchange Commission.

On a call with investors, the brash 73 year old ranged from indignant to flippant as he argued there was no way he would allow the US authorities to destroy a reputation built over decades.

    Mr Cooperman is waging a high-stakes personal battle but the SEC’s action is also likely to reverberate through the old-school hedge fund industry that he symbolises.

    The arc of Mr Cooperman’s career tracks the rise of hedge funds from a cottage industry for the super rich in the early 1990s to a mass market product for pension funds. More recently, as Mr Cooperman’s Omega Advisors fund has struggled to generate returns for its clients, his later years have mirrored the wider travails of an industry that increasingly appears to be leaving his style of trading behind.

    Mr Cooperman is part of a small coterie of celebrity hedge fund managers who have cultivated images as market savants through frequent television appearances, pronouncing on issues ranging from individual stocks to Hillary Clinton’s private life. Yet even before his run-in with the SEC there have been growing signs that the age of the personality-driven hedge fund of old, epitomised by Mr Cooperman’s style, is coming to a close.

    “Hedge funds have always tended to have one big personality running them, rather than teams.” says Alper Ince of Paamco, a California-based fund of funds. “There will always be star managers, but as these funds have got bigger its hard for all of them to perform at the same time.”

    Omega’s flagship fund, which attempts to generate absolute returns by buying shares in good companies and selling short shares in bad ones, has returned more than 10 per cent since its inception in 1991. But it has lost money in the last two years while the wider stock market has risen in value.

    At the same time the average hedge fund has severely underperformed simple indices of bonds or equities since the financial crisis, and the clients with the biggest cheques — large pension funds and endowments — are increasingly showing signs of preferring the lower cost, computer-driven rivals to Mr Cooperman’s bold style of stock picking.

    The total assets under management of the hedge fund industry exploded in size from $500bn at the turn of the millennium to almost $3tn by 2015. As assets have grown performance has suffered, with hedge funds as a whole failing to beat the S&P 500 over the past four years in a row.

    Some of the industry’s most famed stock pickers have been humbled by big bets going awry. Bill Ackman, one of Wall Street’s flashiest showmen, made the largest single loss of his career putting a fifth of his fund into Valeant Pharmaceuticals. David Einhorn’s declared the solar company SunEdison to be a bargain only to see it file for bankruptcy protection.

    Several large US public pension plans have scaled back their investments in hedge funds, including pensions for California’s public employees, New Jersey, and Philadelphia.

    The allegations against Mr Cooperman have also reopened questions about the methods hedge funds use to gain an edge.

    The SEC has accused Mr Cooperman of using his influence as a major shareholder to gain access to non-public, market-moving information and then improperly trading on it.

    But hedge funds have long depended on developing relationships with company management as a critical part of the research they do when they evaluate which companies to invest in or bet against. The public website for Citadel, for instance, boasts that it had 12,500 such meetings last year alone.

    Since the financial crisis, however, the SEC and federal prosecutors have cracked down hard on investors and corporate insiders whom they believed have crossed the line between doing research and stealing or leaking secret company information. They have also proved willing to use enforcement tactics, such as wiretaps and surveillance, that had previously been reserved for organised and violent crime cases.

    The 2009 arrest of Galleon Group’s Raj Rajaratnam for insider trading sent a wave of fear through the industry and kicked off an unprecedented string of cases. His 2011 conviction on 14 criminal charges was followed a year later by the conviction of one of his most prominent sources, former McKinsey managing partner and Goldman Sachs board member Rajat Gupta, as well as a corporate guilty plea from Steven Cohen’s SAC Capital.

    Since then many managers and analysts at hedge funds that do active company research — instead of trading on market signals or betting on macro trends — say they feel their work methods are under attack. Their troubles have been reflected in wilting returns.

    There has been a swing back in favour of the industry in the last couple of years, after a high profile appeals court reversed the convictions of Todd Newman, a former portfolio manager at Diamondback Capital, and Anthony Chiasson, a former money manager at Level Global Investors. That ruling made insider trading cases harder to win because it required prosecutors and regulators to show that the person who leaked the financial information had reaped a concrete financial benefit.

    SEC charges cast dark cloud over Cooperman’s APL trades

    Leon Cooperman, chairman and chief executive officer of Omega Advisors Inc., speaks during a Bloomberg Television interview in New York, U.S., on Tuesday, Oct. 13, 2015. Cooperman said the U.S. Securities and Exchange Commission needs to address market structure problems caused by super-fast computers. Photographer: Chris Goodney/Bloomberg

    Hedge fund investor faces even more serious allegation of a cover-up in insider trading probe

    In the wake of that decision, prosecutors dropped criminal charges against one SAC Capital trader and the SEC reached a deal with Mr Cohen that banned him from managing outside money until 2018.

    Now the US Supreme Court is hearing another case that could expand the appeals court ruling nationwide, or reverse it.

    But the SEC’s case against Mr Cooperman suggests that it has found a way around that legal quagmire. Rather than alleging that a corporate executive improperly leaked to Mr Cooperman, the watchdog claims that Mr Cooperman “misappropriated” the information by buying shares and options after promising not to trade on it.

    Hours after the charges, Mr Cooperman suggested he could turn Omega into a family office. If the company’s management decides the regulatory challenges are too much of a distraction, they will voluntarily return money to investors. More than a third of the firm’s $5.4bn in assets, down by half from the peak in 2014, is money from its partners.

    If Mr Cooperman does take that route, he will have company. Mr Cohen is running a family office while he waits for his ban to expire.

    Last year BlueCrest, which had been one of the world’s largest hedge funds by assets, decided to return outside assets to clients. Its founder Michael Platt declared that the traditional fee model of “two and twenty” that has sustained the industry since its inception was “no longer a very profitable business”.