How to run your hedge fund from a prison cell
Oct 6, 2012
As if America’s hedge-fund elite didn’t have enough crises to worry about – riots in Spain, the fiscal cliff, Lindsay Lohan’s hotel brawl – the parade of underlings copping pleas to insider-trading crimes just keeps growing. Every week it seems another one flips, promising to turn state’s evidence.
Time is money, as they say. And it would take a true genius to make money out of the kind of time some of these people are facing. Still, you don’t get to work at a $14 billion hedge fund like SAC Capital Advisors without abundant self-confidence and inner drive. So if you are someone like Jon Horvath, now isn’t the time to give up on your dreams, just because you face the prospect of years in the slammer.
Horvath, 42, is the former SAC analyst who pleaded guilty last week to securities-fraud charges after admitting to participating in an insider-trading ring. Soon he will probably join former Galleon Group kingpin Raj Rajaratnam and dozens of other recently convicted hedge-fund masters and tipsters now populating America’s minimum-security prisons.
We can imagine what the fittest among them might be thinking: “Now that I’m truly on the inside, how can I use this opportunity to make as much money as I did on the outside?”
Suppose you are a skilled hedge-fund veteran who has just reported to prison. A little- appreciated fact is that there is no U.S. law preventing a convicted felon from managing a hedge fund, as long as that person isn’t required to be registered under the Investment Advisers Act. Or at least that is what the attorney who lost your case at trial once told you.
Fortunately, it is understood there are two kinds of crooks in this business: those who get rich by cheating their clients, and those who make their clients richer by cheating everyone else. You are the latter kind. Your clients’ faith in you remains unshaken. You traded on inside information – for them! You risked going to prison – for them! You were doing God’s work – for them!
They stood to make money even if you got caught. And sure enough, you did. Your clients’ interests always come first. (And unlike Goldman Sachs you really mean it.) Now they owe you. Judging by all those kind letters they wrote begging the judge in your case for leniency, they know it.
You pull out the rock you smuggled in to mark the passing days on your cell’s walls, and proceed to carve out a plan, which goes something like this: In these troubled economic times, when the stock market is soaring yet the only thing keeping the financial system alive are empty speeches from an Italian central banker, investors need the safety and security that can only come with having no ability to access their money for anything.
That’s right, you will tell them: They should park their money with you – someone they can trust who, due to extenuating circumstances, won’t be able to touch it, either.
You figure the standard hedge-fund-industry fees shall apply: 2 percent of assets and 20 percent of annual returns, to protect your clients from doing anything with their money themselves, like losing it on shares of Facebook. Except there will be no profits to speak of at your new fund, Long Sentence Capital Management.
All money will be placed in ordinary deposit accounts at a Cayman Islands branch of a U.S. too-big-to-fail financial institution such as JPMorgan Chase. (For clients who want to feel like you are doing actual work, tell them: “The algorithms will take care of the rest.”) A brilliant strategy, you tell yourself. When the rest of the world is down 90 percent, your clients will still be rich.
Now for the hard part: What to do with the rest of your time?
A guard knocks on your door. He has a message from the associate warden. Good news: Your request for email privileges has been granted.
Tomorrow will be the start of a new, glorious future.