FrontPoint Partners LLC may see investor withdrawals from its health-care hedge funds after a manager allegedly received non-public information about Human Genome Sciences Inc.'s. hepatitis-C drug Albuferon.
“This fund will be subject to redemptions as the government will go after illegal profits,” said Peter Rup, chief investment officer at Artemis Wealth Advisors LLC, a New York-based firm that allocates money to hedge funds for clients. “Once one illegal trade by this fund is identified, all others will now be scrutinized.”
The Securities and Exchange Commission this week filed a lawsuit alleging that Yves Benhamou, a French doctor and former adviser to Human Genome, shared insider information with a co-conspirator at a hedge fund, allowing that fund to avoid about $30 million in losses. A person familiar with the situation identified the hedge fund firm as FrontPoint, the unit that's being spun out of Morgan Stanley.
While FrontPoint hasn't been accused of wrongdoing, investors may pull money unless they can be sure the Human Genome tips were an isolated incident, said Craig Lilly, a Palo Alto, Calif.-based attorney at Squire, Sanders & Dempsey LLP. Galleon Group LLC, the New York-based hedge fund run by Raj Rajaratnam, closed last year after its billionaire founder was charged with insider trading.
After Mr. Rajaratnam was arrested in October 2009 for insider trading, his $3.7 billion Galleon Group hedge fund firm received $1.3 billion in redemptions in a matter of days; within a week, he had decided to liquidate his funds.
“There are some parallels with the Galleon case,” said Mr. Lilly, whose clients include hedge funds. “The fund will most likely receive a considerable amount of redemption requests unless they can demonstrate that the person's conduct was an isolated incident.”
FrontPoint, which wasn't named in the complaint, said in an e-mailed statement Monday that it's “cooperating fully.” Chip Skowron, a co-portfolio manager of the Greenwich, Conn.-based firm's health care funds, was placed on leave pending the outcome of the probe, the firm said.
Steve Bruce, a spokesman for FrontPoint, declined to comment on redemptions. Mr. Skowron didn't return a message seeking comment.
FrontPoint is in the process of being spun out of Morgan Stanley four years after being acquired as part of a push into alternative assets. FrontPoint's managers, led by co-Chief Executive Officers Daniel Waters and Michael Kelly, are gaining a majority stake in the firm and will replace New York-based Morgan Stanley's affiliates as the funds' investment adviser and general partner.
“Even a yet-to-be substantiated claim of malfeasance presents potential headline or reputational risk for large institutional investors,” said Peter Rajsingh, a managing member of Castellar Partners LLC, a New York firm that advises pension funds and other institutional clients on investing in hedge funds. “As fiduciaries for a variety of underlying investors, institutions are generally sensitive about becoming exposed to forms of non-portfolio risk.”
Artemis' Mr. Rup said scrutiny will probably be limited to FrontPoint's health-care funds. Unlike the Galleon case, where 21 people including the firm's founder were charged, Mr. Benhamou is the only person to be charged so far in the Human Genome insider trading probe.
FrontPoint's health-care funds oversee about $1.5 billion, according to two investors, more than a fifth of the $7 billion the firm has under management.
The FrontPoint Healthcare Flagship Fund has returned 0.7% this year through September and 6.4% annualized since inception in 2003, according to an investor letter. The FrontPoint Healthcare Flagship Enhanced Fund has gained 2.2% this year and returned 9.2% per year since its 2006 start. FrontPoint also manages the FrontPoint Healthcare Horizons Fund.
Hedge funds have returned 4.7% in the same period, according to Hedge Fund Research Inc. in Chicago.
Mr. Benhamou, who was arrested this week in Boston, repeatedly shared non-public information he gleaned from working for Rockville, Md.-based Human Genome with his co-conspirator at the fund, prosecutors alleged in court papers.
For example, on Jan. 18, when the company asked Mr. Benhamou for advice on a news release to disclose negative information about the Albuferon trial, he immediately shared the development with his co-conspirator, prosecutors said. The co-conspirator at the hedge fund seven minutes later directed a trader at the fund by instant message to “sell the HGSI” and “all of it,” prosecutors said.
A lawyer for Mr. Benhamou, Joseph Zwicker, didn't return a voice-mail message left at his office.
Mr. Skowron ran FrontPoint's health-care investments with Jason Bonadio, Ajay Bhalla and Kevin Caliendo, according to FrontPoint's marketing documents dated September. None of them has been named by the SEC or prosecutors in connection with the Human Genome probe.