Do hedge funds create criminals?

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Hedge funds have been engaged in criminal activity. The two go together.

In November, the Federal Bureau of Investigation raided three hedge funds. The FBI took away boxes of documents. In the weeks since the raids, federal prosecutors have served subpoenas on nearly 20 hedge funds, mutual funds, investment firms and research consultants. It's all part of an ongoing investigation into insider trading.

That came after the 2009 crackdown on the Galleon Group hedge fund for insider trading.

Now researchers say this is all to be expected. Hedge funds breed criminal behavior so what we have seen so far could be just the tip of the iceberg. First, hedge fund traders are routinely instructed by their managers and investors to focus on maximizing portfolio returns so obeying federal securities laws does not sit at the top of their to-do lists. Secondly, while most traders follow their conscience, hedge fund traders are more likely to brag about their superior results. They are less willing to sacrifice those results out of ethics. And finally, hedge fund traders are more likely to see things like insider trading and securities fraud as victimless crimes. Which makes it a lot easier for them to break the law.

These findings suggest that hedge funds need to be watched carefully. And if they create criminal behavior, we need special rules to keep them in check.


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