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Galleon trial showcases a classic — and dwindling — type of hedge fund

Galleon Group founder Raj Rajaratnam is accused of insider trading. Meanwhile, hedge funds are relying less on stocks, favoring high-tech trades of other securities.

March 08, 2011|By Nathaniel Popper, Los Angeles Times

More recently, high-frequency traders took some of the blame for the so-called flash crash last May, in which the Dow Jones industrial average plunged nearly 900 points in 15 minutes.

Regulators should spend more time looking at the dangers arising from these newfangled funds, said Marshall Auerback, who works at Madison Street Partners, a hedge fund in Denver.

"You are always responding to the last crisis, not anticipating the next one," Auerback said. "Is this the really big problem [prosecutors] should be focusing on right now? Probably not."

The investigations have given the hedge fund industry a black eye and led investors to withdraw money from firms that received subpoenas — even those that have not faced any charges of wrongdoing.

Beyond the hedge funds involved, though, the investigations do not seem to have damped investor enthusiasm.

Hedge funds saw an overall inflow of $55.5 billion last year; in the previous two years, investors took a total of $285 billion out of hedge funds, according to data from Hedge Fund Research.

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