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

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