Diamondback Capital Management and Level Global Investors, the two SAC Capital Advisors–related hedge funds raided November 22 by the Federal Bureau of Investigation, are among the funds heavily favored by public pension plans—including large pensions for New York state retirees and Texas teachers—that have chosen to invest directly into hedge funds.
Diamondback, Level Global and Loch Capital Management were each raided by the FBI that day as part of a large government probe of insider trading activities. The FBI said in a statement that it had obtained court-authorized federal search warrants as part of a continuing criminal investigation. SAC received a government request for documents. Diamondback and Level Global have since told investors that the U.S. government later informed them that they are not targets of the investigation. Diamondback’s letter added that the investigation focuses on one particular portfolio manager, whom the hedge fund declined to name, and a former employee who reported to him. The portfolio manager has since been put on leave. Level Global’s letter declined to elaborate further.
Several pension funds were steered to Diamondback and Level Global by consultants including Aksia, a firm in New York that advises pension funds on their hedge fund investments, and Cliffwater, a hedge fund consulting firm in Marina del Rey, Calif. “We would expect any manager contacted by the authorities to fully and expeditiously cooperate and to act in the best interests of the funds they manage,” said Jim Vos, chief executive at Aksia.
“We continue to monitor the situation and wait and see. It’s hard to tell yet what the investigation relates to,” said Stephen Nesbitt, chief executive of Cliffwater.
The New York State Common Retirement Fund, the Indiana Public Employees’ Retirement Fund and the School Employees’ Retirement System of Ohio—all clients of Aksia—are invested in both Diamondback and Level Global. New York Common invested $100 million in Level Global in January of this year.
Other pension investors in Diamondback include the New Mexico Public Employees Retirement Association (PERA), a Cliffwater client that invested about $40 million. The Missouri State Employees’ Retirement System and the Philadelphia Public Employees Retirement System (an Aksia client) also directly invested in Diamondback.
Pensions that invested in Level Global also include the Teacher Retirement System of Texas and the West Virginia Investment Management Board, clients of Albourne Partners, a consulting firm with offices in Rowayton, Conn., and San Francisco.
The New Jersey Division of Investment, a Cliffwater client, also initially allocated $75 million to the hedge fund in February 2008. Albourne did not return calls by press time.
Many pension funds are also likely to have exposure to Diamondback and Level Global through their funds-of-funds investments, as many institutional players had also placed money with the managers. Those firms include Grosvenor Capital Management and Morgan Stanley Alternative Investment Partners (see story below).
Pension funds generally put managers that are the subject of investigations on watch status—meaning that they will formally review those investments and may eventually redeem—if they expect the investigation will disrupt their investment process.
But most of the pensions contacted by AR said they have no details beyond what they’ve seen in the press. Diamondback said it is cooperating with the investigations. Level Global declined to comment, and Leonard Pierce, a lawyer at Boston law firm WilmerHale who is representing Loch Capital, did not return calls by press time. No charges have been filed.
“We’re monitoring the situation. There is not a lot of information available yet, so we haven’t made any decisions,” said Tim Barbour, a spokesman for Ohio Schools.
Christopher McDonough, chief investment officer for Philadelphia, said it is too early to tell what the investigation entails. Maneck Kotwal, investment officer for hedge funds at New Jersey, and Jason Goeller, investment officer for hedge funds at New Mexico PERA, said they are aware of the situation but declined to comment further. Aksia has not made any recommendations on watch status or redemptions. The insider-trading probe was described by the Wall Street Journal as a far-reaching investigation that could result in charges against consultants, investment bankers, hedge fund traders, mutual fund traders and analysts. The investigation has been conducted by the FBI, the Manhattan U.S. Attorney’s Office and the Securities and Exchange Commission over the past three years and could result in charges by the end of this year, the paper reported.
Larry Sapanski, Richard Schimel and Chad Loweth founded Diamondback Capital Management in 2005. Diamondback, which is based in Stamford, Conn., manages $5.8 billion in assets.
Sapanski and Schimel both previously worked at SAC Capital Advisors as portfolio managers, and Schimel is the brother-in-law of SAC founder Steve Cohen.
Loweth, who parted ways with the firm earlier this year, worked with Sapanski at Morgan Stanley. Sapanski and Loweth are brothers-in-law who have known each other since high school.
Sapanski and Schimel, co-chief investment officers, manage the firm’s multistrategy hedge fund, which has produced gains every year since its inception in July 2005. This year the fund was up 6.25% through November 19. It has returned a total of 72.66% from inception through July 2010.
Level Global Investors, which manages $3.78 billion, was founded by David Ganek in 2003. This year its global equity hedge fund, Level Global Overseas, was up 7.72% through October. It has produced an annualized return since inception of 9.31%. The firm is based in Greenwich, Conn.
In April, Petershill, a Goldman Sachs leveraged buyout fund that takes stakes in hedge funds, bought a stake in Level Global, which offers quarterly liquidity with 60 days’ notice.
Loch Capital Management, a U.S. long/short equity hedge fund firm in Boston, was founded by twin brothers Timothy and Todd McSweeney in early 2003. Loch Capital now manages $750 million, according to an SEC filing. Timothy McSweeney was a former portfolio manager for Essex Investment Management’s Essex Global High Technology Fund, while Todd was the former head of global technology at Baring Asset Management.
Balyasny Asset Management, a long/short equity firm in Chicago, also received a subpoena from the government on November 22. The firm told investors the government requested “a broad set of general information for the last few years.” Balyasny, which said that is taking the request seriously, said, “We are quite comfortable with the credibility of our processes, and of our employees.”
Balyasny was founded in 2001 by Dmitri Balyasny.
Last year, Balyasny issued a letter to investors in response to an SEC investigation centered on Mark Adams, a former analyst at Balyasny, who was accused of allegedly passing along nonpublic material to Steven Fortuna, the co-founder of Boston’s S2 Capital Management. Fortuna pleaded guilty to insider trading charges related to the Galleon Group case.
Adams worked as an analyst at SAC Capital before joining Balyasny.
In the letter to investors, Balyasny sought to reassure its clients. The firm highlighted its plans to consolidate operations by closing its satellite office in Boston and to terminate Adams.
The letter said the firm had not been contacted by the U.S. Attorney’s Office but had instead reached out to offer assistance in the investigation.
