The lowdown on Raj

Image from NY Daily News

Image from NY Daily News

Raj Rajaratnam was just arrested with five other people under charges of insider trading. This case is of special interest to us in Sri Lanka because old Raj was counted upon many as a powerful force in bringing credibility to Sri Lankan investments.

Hedge Funds

Raj is a manager of a hedge fund. Hedge funds are basically organizations that take the money of very wealthy people, put it all together, and invest it in various forms all over the world with the aim of constantly increasing the fund’s Net Asset Value. The NAV is basically the amount of money in the fund.

Hedge funds will invest in various ways, they will lend, they will buy and sell stocks, they will buy and hold stocks and bonds etc etc. Their ultimate purpose is to use their investors money and increase it.

Hedge funds are run by managers who will manage their clients’  money. A lot depends on the reputation and past results of managers as investment is a game that places a lot of trust in credibility. Most good managers start their own funds and charge their clients a commission on the profits. Raj started the Galleon Group in 1996 and has been very successful.

Forbes Magazine has ranked him the 559th richest man in the world and the 236th richest American for 2009. He is also currently the richest Sri Lankan in the world.

Insider Trading

Information is a key aspect in investment. It is much easier to make money if you get information faster and before anyone else. This will allow you to get to know about potential changes in the market before anyone else, enabling you to buy or sell in anticipation of these changes and make some quick money.

This kind of information is called insider information. Insider information can be obtained from various ways like contacts inside companies, governments etc. Trading based on insider information is known as Insider Trading.

Insider trading is illegal because so much of the market depends on the fair and free flow of information. When information is restricted to a few individuals, it allows these individuals to make profits at the expense of other investors in the market.

Crimes such as these are very hard to track down and prove. The wiretapping into collecting evidence against Raj Rajaratnam apparently started somewhere back in 2006.

Dubious Purpose

Raj, together with his accomplices in other hedge funds, is accused of sharing insider information relating to various tech stocks like Google and Sun Microsystems. I am also reading several internet news reports now on how Raj may have sponsored the LTTE back in the day but im not sure how credible they are. He has, however, been a generous contributor to the Democratic Party.

Reports so far indicate that the scheme has earned profits of about 25 million USD. And RR’s personal earnings amount to up to about 20 million USD.

Sri Lanka

Implications to Sri Lanka will probably depend on Raj Rajaratnam’s autonomy from the Galleon Group in the investment decisions made on Sri Lanka. What he brought to Sri Lankan investments in terms of credibility wont matter much if Galleon sticks around and continues investing here. Also i think we are at a point where a lot of other big investors have looked at the prospects here and have formed their own conclusions and most of them are positive.

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7 comments
  1. maf said:

    GG/ Whacko – appreciate you are trying to dumb-down this down for those who may not fully understand what they read on the internet/news wires etc but you have over-simplified in the most part:

    hedge funds are usually run as 2 & 20 operations and come in many different varieties: long-short being the most common (and looks like how galleon was run). 2 & 20 means a 2% management fee of the Asset Under management (NOT Net Assets) and 20% of the profits (usually calculated on yearly basis and involves the increase in the assets under management for that year). Long-short means they can go long on stocks/bonds/derivatives (ie buy them for keeping) or short them (ie sell them at a high and then buy them later when the prices come down) You generally go long on good news about a company and go short on bad news.

    insider information is defined as information that is NOT available to the public at large not how you have defined it above. thus the information Raj and the co-conspirators had allowed them to take trading stakes before the market was aware of it and use this to make gains.

    Hi co-conspirators were NOT all other hedge fund managers but were from Intel Capital – a venture capital firm, McKinsey & Co – a large management consulting firm, IBM and Newbridge Capital.

    the FBI have been on his case from 2007 not 2006.

    Implications for Sri Lanka could be multi-faceted and it will be interesting to see what happens on Mon 19 Oct in the shares that RR and Galleon hold: JKH, NDB, DFCC, SLT, Dialog to name a few of his top holdings. This could have repercussions on the market as a whole in the short-medium term.

    • Whacko said:

      well there appears to be some confusion on who the other culprits are then. to my knowledge they are mostly associated with other funds/ financial firms as per this link here.

      As for hedge funds yes i was giving a pretty watered down version of it and no i didn’t think i needed to go into details on their various strategies. And as for insider info, it has to be knowledge that will affect the market at some point after it having come into the hands of the insider traders, otherwise it defeats the purpose of possessing such information in the first place so i don’t see where my definition is wrong..don’t see anything wrong with ur definition either

  2. Jack said:

    Jackass. Don’t plague us with your two cents when you don’t have a clue about Hedge funds let alone RR. Stick to what you do best, trolling !

    • Whacko said:

      u mean stick to what YOU do best, trolling 🙂

  3. Raji said:

    Thanks for the post Abdul. Do you have any information about his alleged links to the Tamil Tigers? I keep seeing this reference in several news reports.

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