VR Logo

Easy Telling Tales

In reality, investment managers try all kinds of tricks to live up to the stories they create…

There can be little doubt now that US hedge fund manager R Rajaratnam and his friends really were running an insider-trading operation. Someone glancing at the news stories about the case would probably come to the conclusion that whatever these people were doing was fabulously successful. After all, Rajaratnam and his people went to great lengths to run this information network. People like Rajat Gupta and Anil Kumar risked (and lost) all the achievements of their professional lives in order to feed inside information to Rajaratnam’s Galleon Fund.

So it all must be incredibly profitable, no? Galleon’s returns must be exceptional; its investors must have been enriched beyond belief and Rajaratnam must be the best hedge fund manager around? Curiously, none of these things are true. Rajaratnam was a successful fund manager, but he wasn’t all that much better than many others. He did pay off Gupta and Kumar, but it wasn’t a multiple of their legitimate income. Most amusing of all, Rajaratnam’s gains on some of the actual trades that he did based on the inside information have been shown to be no better than what could have been achieved by just reading the news.

Clearly, top investment managers in the world’s leading markets find it difficult to beat the averages once their huge expenses and fees are deducted. All this hyperactivity adds up to little more than a lot of sound and fury that creates the notion that investment managers are doing something exceptional. In reality, they are floundering around, trying all kinds of tricks because the straight path doesn’t yield the returns that they promise in the stories they narrate.

Now, it’s possible—as some people are whispering—that such insider leaks are routine in Wall Street and Rajaratnam, Gupta et al were simply targeted because they were seen as a ‘South Asian Mafia’ that had become too big for its boots. But that’s not point at all. If your business’ posture involves delivering something that you can’t, then it matters little what kind of a mafia you are.