Hedge Fund GLG Is Probed on Role Of a Star Trader
By ANITA RAGHAVAN
Staff Reporter of THE WALL STREET JOURNAL
October 26, 2005; Page C1
European regulators, in an intensifying investigation of British hedge fund GLG Partners LP, are focusing on the activities of a star trader who helped build the $11.5 billion fund, people familiar with the matter say.
The probe, by British, French and Spanish securities regulators, is examining whether the senior GLG trader, Philippe Jabre, improperly used nonpublic information on coming convertible-bond deals to trade on behalf of his fund, the people say. The trades under scrutiny relate to securities issued by Sumitomo Mitsui Financial Group Inc., Vivendi Universal SA and Alcatel SA, these people say.
The developments come amid a broader examination of hedge funds world-wide, as these lightly regulated investment pools wield ever more market clout.
Hedge-fund assets now total nearly $1 trillion -- double that of five years ago -- and account for more than 70% of the daily activity in the convertible-securities market, Credit Suisse First Boston said in a recent report. Convertible securities typically are preferred stock or bonds that are exchangeable into a fixed number of shares of common stock at a set price.
In recent years, some regulators have become concerned that hedge funds, which dole out hundreds of millions of dollars in trading commissions each year, may be exploiting their market clout to get an edge in ferreting out nonpublic information and trading on it.
"Some hedge funds are testing the boundaries of acceptable practice concerning insider trading and market manipulation," Hector Sants, managing director at Britain's Financial Services Authority, which is one of the regulators examining GLG, said in a speech in September.
Mr. Jabre is a 45-year-old manager of GLG's $1.85 billion convertible-bond arbitrage portfolio, known as GLG Market Neutral Fund. He declined to discuss the investigations. "All these things, whether they are true or false, they are private," he said in a telephone interview, referring inquiries to GLG's press office.
European regulators have been investigating GLG's activities for more than a year. A spokesman for the FSA declined to comment on the investigation into GLG and Mr. Jabre. A spokesman for the Spanish securities regulator, the Comisión Nacional del Mercado de Valores, or CNMV, also declined to comment.
The multiregulatory probe casts light on a controversial aspect of the hedge-fund boom. These funds have become so big, and generate such significant trading commissions for the securities business world-wide that they command access to securities deals and information that smaller investors can't.
This privileged access partly enables the funds to at times generate steep investor returns -- and big fees for hedge-fund managers. But it also has triggered regulatory concern about whether hedge funds have an unfair advantage over ordinary investors.
Some regulators believe more hedge-fund oversight is needed. The U.S. Securities and Exchange Commission recently proposed a rule requiring hedge-fund advisers to register with the SEC. Some agency officials believe the SEC needs to get a handle on how the fast-growing industry operates to prevent potentially fraudulent behavior, though critics argue that such oversight would do little to prevent wrongdoing.
At issue in the investigation of GLG and Mr. Jabre is activity during securities firms' "premarketing" of these issues -- when they sound out potential investors about their appetite for a bond or stock offering before the sale of such securities. Such premarketing is viewed by securities firms as a legitimate way to gauge demand for corporate securities but the FSA forbids funds from trading on information that isn't public.
Among the deals being examined in the FSA investigation is a $2.9 billion convertible-bond issue offered by Sumitomo Mitsui Financial Group of Japan in 2003, people familiar with the matter say. Mr. Jabre received details of the coming convertible-bond issue from the deal's manager, Goldman Sachs Group Inc., a person familiar with the situation says. It is unclear whether Mr. Jabre himself made any trades tied to the Sumitomo news on behalf of his fund.
At the same time, French regulators are in the final stages of investigations into whether there was any insider trading in two convertible bonds issued in late 2002 by French media titan Vivendi Universal and French telecommunications-equipment maker Alcatel, a person familiar with the situation says.
Having completed an initial report in December 2004 on the two cases, both of which involve GLG, the French Financial Markets Authority currently is getting input from market players before determining whether disciplinary actions are warranted, the person familiar with the situation says. The report hasn't been made public. It is unclear whether Mr. Jabre himself made any trades tied to Vivendi or Alcatel on behalf of his funds.
Potential sanctions in each matter could amount to fines of up to 10 times any amounts improperly received, the person familiar with the matter says. Five hedge funds, including GLG, generated a profit totaling about €12 million ($14.4 million) on the two convertible-bond issues, the person says.
The French regulator is examining, among other things, whether the hedge funds improperly traded either the Vivendi or Alcatel deals, or both, the person says. In addition to GLG, the funds are UBS AG's O'Connor, Meditor Capital Management, Ferox Capital Management and Marshall Wace Asset Management, the person familiar with the situation says.
Representatives for UBS, Ferox and Marshall Wace declined to comment. A call to a Meditor representative wasn't returned.
Mr. Jabre joined GLG in April 1997 from BAII Asset Management in Paris, where he popularized convertible-bond arbitrage -- buying convertible bonds and taking short positions, or bearish bets, on the underlying stock -- when it was still an emerging business in Europe.
Between 1998 and 2004, his GLG Market Neutral Fund produced average annual returns, after fees, of 23.1%, according to a GLG Global Investment Management performance summary dated March 31, 2005. The performance refers to Class Z shares, which carry lower fees than other classes of the fund's shares, which are listed on the Irish Stock Exchange.
The stellar showing helped draw assets to the fund, which in 2003 swelled to more than $4 billion, people familiar with the matter say.
The fund's assets have dwindled this year, to about $1.85 billion amid a weak market for convertible bonds. The Market Neutral Fund lost nearly 10% in May alone, and for the year through September is down 2.3%, according to a person familiar with the situation.
As a trader, Mr. Jabre often makes big bets on everything from currency movements to macroeconomic trends, says another person familiar with the situation. Meticulous and serious, Mr. Jabre has an uncanny ability to recall prices he has paid for securities years ago, traders say.
Mr. Jabre trades the Japanese, London and New York markets, often catching just a few hours of sleep, traders say. At times, traders say, Mr. Jabre would hand dozens of trading tickets to clerks on GLG's trading desk in the morning, reflecting the number of transactions he had done overnight at home.
Mr. Jabre also tends to trade based on big-picture trends, people familiar with his trading style say. One of his biggest money-making trades was loading up on corporate bonds in late 2001 and 2002 when investors were pessimistic about the economic outlook and shorting -- or making a bearish bet -- on U.S. Treasurys, a person familiar with the matter says.
Mr. Jabre's fund profited, this person says, when corporate bonds became more attractive as prospects for the economy brightened.
--Charles Fleming contributed to this article.
Write to Anita Raghavan at anita.raghavan@wsj.com |
