Thursday, October 22, 2009 0 comments ++[ CLICK TO COMMENT ]++

Galleon informant not reliable... plus Galleon has Madoff-like returns

It looks like the Galleon case is not as fool-proof as it seemed. The Huffington Post picks up a New York Times story revealing one of the major moles is Roomy Khan, apparently a California-based ex-employee of Galleon.

A problem for the prosecution is that she apparently had financial problems and appears to have turned on Raj Rajaratnum when he refused to let her back into his firm. This sounds like some desperate move and who knows if she attempted black mail before co-operating with law enforcement so I'm not sure what a judge or jury will think.

Furthermore, it appears the Khan family has had two prior legal problems, including a now-settled lawsuit with a housekeeper. They apparently also defaulted on a loan by Deutche Bank, which was settled after being paid with interest.

So, it appears, at least to me, that the Khan family is very shady and unreliable. This doesn't let Rajaratnum off the hook—the government has other informants as well—but the case is not as strong as it seems.

Now, moving onto Galleon, The Huffington Post also picked up a blog entry by The Pragmatist Capitalist, where the author suggests that Galleon was posting unbelievable, Madoff-like, numbers:

Reader DanH was nice enough to forward us a recent copy of Galleon Groups performance going back to 1992. It turns out that the fund was Madoff-like in its performance. These guys just couldn’t lose. Whether the market was up or down they cranked out 25% returns like they were printing money. It makes you wonder just how long these guys were trading on insider information?

I have run the risk adjusted returns on hundreds if not thousands of portfolios throughout my career and I have never seen numbers like these. NEVER. There is virtually ZERO downside volatility in these figures. Their largest one month drawdown was -6.19%!* That is simply unheard of for a portfolio with such high returns. Gauging from the returns I would be willing to bet the insider trading was going on for most of Galleon’s existence and was likely much more rampant than currently reported:

* Correction – Galleon’s worst month listed here was a -8.54% decline in October of 1997. In other notes, it’s interesting to see that Galleon posted just 5 months of 4%+ declines in a total of 186 months listed. Unbelievable.

Although it's easy to say this is all from illicit gains, do keep in mind that many hedge funds post spectacular returns. In fact, Warren Buffett ran a hedge fund that would have been like this (except he would have higher volatility because value investing is not optimized to minimize volatility.) There are many quantitative hedge funds that apparently have a record better than Warren Buffett during his peak with lower volatility. Hedge Funds run by Bear Stearns apparently posted good returns too (although they blew up in the end, imagine if they shut down the fund before it blew up.) I have heard rumours that some of Goldman Sachs funds have spectacular long-term returns as well (but I'm not sure if these are true hedge funds or something related to their trading desk.) So, it's hard to say how much of this is due to fraud or some illegal activity, and how much is real.


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