02:01 PM
Connect Directly

Spurred By Bonuses, Hedge Fund Traders Feel Pressure to Break Rules

A survey reveals the depressing state of a hedge fund trader’s mind: They’ve seen misconduct, would break rules to get ahead and doubt the SEC can do anything to fix the industry.

A few days after SAC Capital's portfolio manager was lead out of his Park Avenue apartment building in handcuffs for allegations of insider trading, we learn that the pressure to break the rules is as intense as the desire to reach alpha.

[Closing in on SAC Capital for Insider Trading, Feds Arrest Portfolio Manager.]

One-third of hedge fund professionals have seen illegal trading practices in their offices and a more than a third believe that they have to break the rules in order to reach alpha, according to a new survey of hedge fund professionals.

The anonymous online survey of 127 hedge fund professionals - conducted by the law firm Labaton Sucharow, HedgeWorld and the Hedge Fund Association - found that not only have traders seen bad behavior, they think that the competition engage in these practices as well.

Nearly half of respondents (46 percent) believe that their competitors engage in illegal activity, while 35 percent say they have personally felt pressure to break rules. Of those surveyed, 30 percent have witnessed "misconduct" in the workplace.

If any regulators or industry critics are relying on whistleblowers, there is some good news. Eighty-seven percent said they would report wrongdoing under the protections of the SEC Whistleblower Program and other such programs. According to a press statement from Labaton Sucharow, Congress has established an Investor Protection Fund, which currently has a balance in excess of $450 million, to pay awards.

"The high percentage of hedge fund professionals that are aware of the SEC Whistleblower Program and are willing to report wrongdoing is extremely encouraging," says Jordan Thomas, chair of the Whistleblower Representation Practice at Labaton Sucharow. "Without individuals willing to report possible securities violations, internally or externally, responsible organizations and law enforcement authorities cannot police the marketplace effectively and efficiently."

Thomas is a former Assistant Director and Assistant Chief Litigation Counsel in the Enforcement Division of the Securities and Exchange Commission.

The survey's other findings include:

  • 35% of respondents reported feeling pressured by their compensation or bonus plan to violate the law or engage in unethical conduct, while 25% of respondents reported other pressures.
  • 29% of respondents reported that they might experience retaliation if they were to report wrongdoing in their fund.
  • 28% of respondents reported that if leaders of their firm learned that a top performer had engaged in insider trading, they would be unlikely to report the misconduct to law enforcement or regulatory authorities; 13% of respondents reported that leaders of their firm would likely ignore the problem.
  • 34% predict that recent regulation and law enforcement scrutiny will weaken the hedge fund industry.
  • 13% said that hedge fund professionals may need to engage in unethical or illegal tactics to be successful and an equal percentage would commit a crime - insider trading - if they could make a guaranteed $10 million and get away with it.

If the SEC’s new leadership wants to be taken seriously, they had betters step up their game. According to the survey, 54 percent of respondents reported that the SEC is "ineffective in detecting, investigating and prosecuting securities violations."

[Winton Hedge Fund Closes Dur to Lack of Interest.]

Phil Albinus is the former editor of Advanced Trading and currently edits the FierceFinanceIT newsletter. Follow him on Twitter at @philalbinus.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

Comment  | 
Print  | 
More Insights
Newest First  |  Oldest First  |  Threaded View
User Rank: Author
4/6/2013 | 9:11:49 PM
re: Spurred By Bonuses, Hedge Fund Traders Feel Pressure to Break Rules
There is obviously some kind of dis-connect within our industry. I personally do not believe that the percentage of insider trading is this high or believed to be ! There are many hard working men and women around the globe who work with a great deal of integrity! Creating alpha is what we strive for every day.The greatest challenge is to use our brains and our experience to be able to create that alpha and generate the returns from all the information that is provided to all investors and traders in the marketplace on a daily basis.
Nathan Golia
Nathan Golia,
User Rank: Author
4/3/2013 | 4:22:05 PM
re: Spurred By Bonuses, Hedge Fund Traders Feel Pressure to Break Rules
A third saw some sort of illegal practice and didn't report it? I'd like to think that if four out of 12 editors on a magazine knew someone was forging quotes or plagiarizing, they wouldn't let it go... but maybe I'm just naive about human nature.
Melanie Rodier
Melanie Rodier,
User Rank: Author
4/3/2013 | 3:43:56 PM
re: Spurred By Bonuses, Hedge Fund Traders Feel Pressure to Break Rules
If so many hedge fund executives are willing to report wrongdoing, how come the Investor Protection Fund still has a balance in excess of $450 million, to pay awards? That seems huge. The Whistleblower program has been around for a while now. Maybe hedge fund professionals (and others in the industry) think whistleblowing is good in theory, but in practice they still don't feel comfortable doing it for a number of reasons, such as being found out, reporting on someone they are close to, or as the survey suggests, feeling pressure themselves to break the rules...
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - Elite 8
The in-depth profiles of this year's Elite 8 honorees focus on leadership, talent recruitment, big data, analytics, mobile, and more.
Stressed Out by Compliance, Reputational Damage & Fines?
Stressed Out by Compliance, Reputational Damage & Fines?
Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.