Nov 29

Is the hedge fund culture fundamentally non-compliant?


Hedge fund managers are quick to point to their “culture of compliance” when responding to allegations of wrong-doing, but are hedge funds wired to shirk compliance? If so, how can we re-wire them? How do we create profit-seeking hedge funds that promote a lawful, fully-compliant culture?

Of course, not every hedge fund firm is out of compliance. Some firms likely have strong compliance programs and strong compliance cultures. But the recent headlines about hedge funds mainly focus on firms that seem to be lacking a strong culture of compliance at core. When it is reported that six current or former employees from one firm (SAC Capital) have been investigated or prosecuted relating to insider trading, it makes you think that the firm’s culture must not be focused on compliance. But SAC Capital is not the only fund with this problem (see Galleon Group, etc.)

It seems that the threat of government prosecution, which may include significant financial penalties and jail time, has not been sufficient to dissuade money managers from crossing the line and relying on material inside information for an investment edge. Thus, it is apparent that unless other incentives gain importance—such as reputation—the government is left to police hedge funds one by one just as it is left to give tickets to those who drive their cars above the posted speed limit, by focusing on the most egregious offenders. But this approach is ineffective. It is likely to lead to over-prosecution of some individuals and funds who are held out as examples and the under-prosecution of many. The behavior that the government seeks to end—insider trading—will continue, just as drivers will continue to speed when they don’t think anyone is looking.

For any real change in behavior to occur, the hedge fund community itself must decide that it wants to embrace a true culture of compliance –and a reputation for compliance—as much as it values beating the market.

For assistance with ensuring that your firm has a culture of compliance, contact Felicello Law today.