It looks like investors don’t want to be part of a hedge fund embroiled in an insider trading scandal.
According to published reports, investors have yanked about half of the $750 million managed by FrontPoint Partners’ health care funds.
If you recall, FrontPoint was outed after the SEC brought insider trading charges against French doctor Yves Benhamou after he allegedly tipped off a hedge fund manager about problems encountered during a clinical trial for a drug. The SEC never named the manager or the firm he tipped off.
According to its complaint, Benhamou was a member of the Steering Committee overseeing Human Genome Science’s clinical trial of Albuferon. At the same time, he provided consulting services to the portfolio manager.
The SEC accused him of telling the portfolio manager about problems with Phase 3 of the trial. The manager, in turn, used this non-public information to sell his entire position in Human Genome held by six healthcare-related hedge funds that he co-managed, or roughly six million shares. The sale enabled hedge funds to avoid losses of at least $30 million.
FrontPoint acknowledged to several media outlets that it was cooperating with the investigation. It also reportedly said Dr. Chip Skowron, a co-portfolio manager of the health care funds, was placed on leave pending the outcome of the investigation.
However, while a number of investors are bailing out of the hedge fund manager’s health care funds, it is not clear what one of FrontPoint’s newest — and perhaps most high profile — investors plans to do: George Soros.
At the end of the second quarter, Soros Fund Management reported for the first time in a regulatory filing that it had an investment with FrontPoint. However, it did not say which specific fund.
A spokesman for Soros declined to comment.
FrontPoint, which recently managed $7 billion, is in the process of being spun off by Morgan Stanley.
Many people are not aware that each quarter in the same report that Soros is required to list his equity-related holdings, he also identifies the eight to 10 money managers to whom he has farmed out money. Most of them are typically hedge funds.
Some are obscure names like Realm Partners, a multistrategy fund founded in 2009 by Robert Millard, a Managing Director at Lehman Brothers from 1976 to September 2008.
Another holding is Round Table Investment Management, formed in 2007 by former Bank of America chief investment officer Ian G. Banwell.
On the other hand, Soros has also had a long-time holding in Discovery Capital Management, founded in 1999 by Robert Citrone, a Tiger Cub who worked for Julian Robertson from January 1995 until March 1999. Since launching the $4 billion Discovery Global Opportunities Partners and its offshore equivalent in August 1999, Citrone has racked up an annualized return of 17.3 percent. Citrone has only had one losing year. For the last half of the past decade, Citrone went long emerging markets and short the developed countries, using currencies and fixed income. He was down 33 percent in 2008, but this came after three straight years of returns that exceeded 20 percent and sandwiched between gains of 57.26 percent in 2007 and 65 percent in 2009.
His other holdings at the end of June included: Atlantic Investment Management, EAC Management, Martin Currie Investment Management, RR Partners, Select Equity Group, and Sirios Capital Management.
By next week, Soros is required to file his next quarterly report, when we’ll find out whether FrontPoint is still in his portfolio. But, keep in mind that report will contain holdings as of September 30, before the SEC announced the insider trading charges against the French doctor.
