FrontPoint Partners LLC, a US$7.5 billion hedge fund under fire for allegations that a manager benefited from insider information, has received about US$3 billion in redemption requests, according to a letter sent to investors on Friday.
The letter, sent by the co-chief executives, Daniel Waters and Michael Kelly, said roughly US$1.5 billion of those requests came from investors fleeing the firm’s healthcare funds, which are at the center of an insider trading inquiry. The healthcare funds were liquidated on Wednesday, according to the letter, and 97 percent of the funds were returned to investors.
US federal authorities have said that the co-portfolio manager of the healthcare funds received inside information about the results of a clinical drug trial from a French doctor, who was arrested earlier this month. Authorities said the insider tips saved the firm about US$30 million.
The redemption requests come at a time of investor nervousness after US federal agents raided three hedge funds this week, sent subpoenas to several others and arrested one expert accused of trading on insider information.
In their letter, the executives said that some investors indicated that they might rescind their redemption requests, and as a result the firm was hoping to start next year with about US$5 billion in assets under management.
The executives told investors that the firm was stable both financially and operationally, and emphasized that it would survive this rough patch.
Prosecutors say the doctor, Yves Benhamou, gave nonpublic information about a clinical trial for a hepatitis drug to a fund manager, who was later identified as Joseph Skowron, co-manager of FrontPoint’s healthcare funds.
Skowron, who has not been charged and was not named in either the criminal or civil complaint, has been placed on leave from the firm.
A representative for FrontPoint declined to comment. FrontPoint has not been accused of any wrongdoing.
Morgan Stanley, which owns a majority stake in FrontPoint, declined to comment on the redemptions. The Financial Times reported the redemption requests on Friday.
Benhamou was released in lieu of US$3 million bail this week.
He was accused of leaking information from November 2007 to January 2008, while he worked on a steering committee that oversaw the clinical trial of a hepatitis-C drug for Human Genome Sciences, the biopharmaceutical company.
It is unclear what the heavy redemptions will do to a planned spinoff of FrontPoint from Morgan Stanley. A media officer for Morgan Stanley said the company was assessing the impact of the FrontPoint-related events and continued to work toward restructuring its ownership in the hedge fund.
Morgan Stanley acquired the hedge fund stake four years ago for about US$400 million and was on the verge of spinning off a majority stake to Waters and Kelly.
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