Should broker/dealers at hedge funds ring alarm bells?

Sat Oct 1, 2005

Bayou's conflicts show the potential problems, but it can be done right

There was no shortage of wrongdoing at Bayou Management, the Connecticut hedge fund firm now under investigation for massive fraud. Among the firm's questionable practices - though not one that explains how $300 million went missing - was executing trades through Bayou Securities, an affiliated broker/dealer controlled by Bayou founder Samuel Israel III.

That trading arrangement was clearly fraught with conflicts of interest, as industry players now eagerly point out. Using Bayou Securities to execute trades raised serious questions about whether transactions were being done on an arm's length basis. It also meant that Israel, the fund manager, was personally profiting from the fund's trading activity.

Still, many hedge fund firms have associated broker/dealers. Among them are such premier names as Citadel Investment Group, Paloma Partners, HBK Investment, Amaranth Advisors, Ramius Capital Group, D.E. Shaw & Co. and Millennium...

ISSN: 2151-1845 / CDC10004H

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