3rd UPDATE: Galleon Group Winding Down All Hedge Funds
October 21 2009 - 2:40PM
Dow Jones News
Galleon Group is winding down all its hedge funds and looking at
alternatives for the business, company founder Raj Rajaratnam told
employees and investors in a letter Wednesday.
One of those alternatives is selling all or part of Galleon to
another firm, according to a person familiar with Galleon. The
person said that some parties have already expressed interest in a
transaction, although it's unclear what parts of Galleon might be
sold.
Rajaratnam was one of six people arrested and charged last
Friday in a massive insider-trading case. The charges had already
caused many Galleon investors to try to withdraw their money. The
deadline for redemption requests in most of Galleon's funds was
Nov. 15.
"I have decided that it is now in the best interest of our
investors and employees to conduct an orderly wind down of
Galleon's funds while we explore various alternatives for our
business," Rajaratnam wrote. Galleon has about $3.7 billion under
management. Rajaratnam and other investors make up more than $1
billion of that, according to Securities and Exchange Commission
documents.
The person close to Galleon added that Galleon's redemption
process will remain unchanged. Investors won't get their money back
until Jan. 1, 2010, barring unforeseen circumstances.
The future of the firm after that is uncertain.
In many past instances of hedge-fund industry consolidation,
large hedge funds have taken over a fledgling's distressed assets
for discounted prices.
When bad natural gas bets caused Amaranth Advisors LLC to
collapse in 2006, Ken Griffin’s Citadel Investment Group and JP
Morgan Chase & Co. (JPM) swooped in to buy the natural gas book
at a discount. The investment ended up being very profitable for
Citadel, according to a source familiar with Citadel.
Citadel also bought the assets of failed hedge-fund company
Sowood Capital in 2007, which collapsed during the credit
crisis.
In the case of Galleon, though, most holdings are equities that
could be liquidated in three or four days without moving the market
much. Selling those assets at a discount might not be necessary for
Galleon.
"At the end of the day, I don’t think anyone is going to be
buying the firm outright," said Robert Olman, president of
executive search firm Alpha Search Advisory Partners, which also
has a hedge fund consolidation advisory business.
However, Olman has heard from some parties interested in some
parts of Galleon’s business, if they become available.
One very important part of the business that could garner
interest from buyers is Galleon’s investment team.
Olman said the executive search part of his firm had already
received resumes from Galleon employees. Alpha only places
hedge-fund employees with seven years or more experience as senior
analysts, experience managing a portfolio, or senior-level risk
managers, typically chief risk officers.
Olman added that he conducted an informal survey of his clients,
who said hiring former Galleon employees would not necessarily be a
problem, despite Rajaratnam's charges.
In Rajaratnam's letter to those employees and investors, a copy
of which was reviewed by Dow Jones Newswires, he said he is
innocent of all charges.
Since Rajaratnam's arrest, Galleon managers have sold some stock
to take cash where they could. Many of Galleon's holdings are
stocks of large companies like Ebay Inc. (EBAY) and Apple Inc.
(AAPL), which usually don't move much when one small shareholder
sells.
But Galleon has somewhat significant stakes in some other U.S.
stocks, like drug company OSI Pharmaceuticals Inc. (OSIP) and
management adviser Huron Consulting Group Inc. (HURN). It's
possible that those stocks could drop in the short term if Galleon
sells, but movements in these shares have been consistent with the
overall market in recent days.
Galleon also owns stocks of several companies based in Sri
Lanka, where Rajaratnam was born. Many of those stocks dropped in
the days following his arrest.
All of Galleon's main hedge funds are up double digits in 2009,
so the "orderly" wind-down will consist of selling many stocks that
have gained this year. That's more desirable than having to sell
while stock prices are dropping.
Hedge-fund managers that are closing funds often attempt these
slower, more orderly sell-offs of their holdings to avoid
disrupting the stocks or the markets.
-By Joseph Checkler, Dow Jones Newswires; 212-416-2152;
joseph.checkler@dowjones.com
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