Or so aruges financial reporter, John Gapper in a recent issue of The Australian. Gapper's tone is more matter-of-fact than accusatory, and his article more an effort to articulate the pressures and potential rewards involved int eh hedge fund trade. The forbidden fruit of inside information combined with novel trading strategies can bring rich rewards indeed. Gapper does not insinuate that the misuse of inside information is endemic in the hedge fund industry, but rather, concludes that "Everyone but the dishonest loses by allowing that imbalance to persist." More from the article:

...You can light up a hedge fund in a few ways. By giving it a trading idea or a piece of research that helps it to make money. By giving it first refusal on a sale of securities. Or, best of all from the perspective of alpha - the exceptional return that hedge funds seek to achieve - by giving it inside information about something that is likely to move markets.

Trading on the last is, of course, against the rules and the law in most countries. By placing its order before share and bond prices change, a fund illicitly takes money away from other investors, even if it feels like a victimless crime. Traders at hedge funds often put intense pressure on bankers to gain scraps of knowledge, but few who abuse inside information get caught and punished...

Inside information has always been leaked by crooked people to others for a profit. What makes hedge funds any more prone to it than others? Well, most crimes are committed by people who have a strong motive and a good opportunity to defy the risk of being caught. Hedge funds, particularly big ones, meet both of the criteria.

The hedge funds' motive is that they must get ahead of the crowd to survive. They can only command fees of 2 per cent of funds under management plus 20 per cent or more of profits by doing so. But competition is tougher and markets less friendly towards hedge fund investment styles such as short-selling and convertible arbitrage than in the past...

The article continues here.

-- MDT