Tuesday, June 2, 2009

Reputation risk sinks Pequot

The resurfacing of an investigation that began in 2006 has led to the shuttering of Pequot Capital Management. The fund, which managed $15 billion at its height in 2001, still managed more than $6 billion in March 2008 and now has $3 billion that will be unwound.

The inquiry focuses on Pequot's trading in Microsoft stock in 2001. While both the SEC and the Justice have reopened the investigation, there is no indication that the regulators will pursue enforcement actions.

Pequot lost money last year, but was up so far this year. Nonetheless, fund manager Arthur Samburg wrote to investors, "With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business.”

Historically hedge funds and other asset managers have been able to weather inquiries and settle with regulators without jeapoardizing their business. These are not normal times, though, and this case shows how management of reputation risk is at least as imporant as the management of market risk to the survival of hedge funds.

Go to the New York Times account of the Pequot closing.
Go to Reuters' story.
See Arthur Samberg's letter to investors.

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