What are hedge funds?

What are the implications of the SAC insider trading case on the reputation of hedge funds?

• It's common knowledge that hedge funds, with some exceptions, are not able to beat the market in recent years. Now, with the SAC insider trading scandal, how will this affect the hedge fund industry going forward? To critics, hedge funds are secretive, risky, loosely regulated playgrounds for the super wealthy. And while the industry keeps expanding, its performance does not. This year could be the fifth in a row that hedge funds underperform the Standard & Poor's 500 stock index, according to Hedge Fund Research, or HFR, which analyzes the industry. Read more: http://www.foxnews.com/us/2013/07/26/hedge-funds-ruled-finance-playground-now-sac-capital-is-just-latest-black-eye/#ixzz2aBJHcSTA

• Answer:

  If this is just an isolated incident, as others in the past, then it is unlikely to have an impact on the industry.  For example, take a look at the mutual fund timing scandal (http://en.wikipedia.org/wiki/2003_mutual_fund_scandal).  This is a case where the government did prove an isolated case of wrongdoing.  The end result was that Millennium paid a fine of $180 million and lost about a billion in assets, but eventually raised those assets back and continued to do well.  The industry continued to grow every year.  Unless this case ends up proving that there is a systemic problem in the industry, it's not clear it will have impact outside of the people directly involved.  I think there are some journalists taking the two stories of hedge funds underperforming the S&P in recent years and the SAC scandal and conflating the two, which have little to do with each other.