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
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...