New Round of Hedgie Prosecutions Shines Negative Spotlight on Industry

A gross, but useful, oversimplification of the way most hedge funds work is that they provide investors with 'alpha' returns, or returns on investment above and beyond expected average market returns, in return for the investors paying higher management fees than they would in, say, a Fidelity mutual fund. How do funds gain alpha returns? Textbooks say things like computer trading, exploitation of market inefficiences and arbitrage, investment in alternative asset classes, targeted risk taking and plain old feet on the ground research. Unfortunately it is becoming increasingly clear that 'cheating' should be added to the above list after what is merely the latest round of high-profile prosecutions in the nearly $2 trillion industry. For the latest details on the charges filed against two former SAC employees yesterday, visit Reuters here.