Gone in 45 days: Who said hedge funds were illiquid?

going down

Galleons have always liquidated quickly

Wire-taps, sting operations and perp walks associated with insider trading allegations and money being funneled to terrorist camps in southeast Asia – all the makings of a John Grisham book, at least one with a financial and Wall Street versus legal bend.

Of interest to AllAboutAlpha.com, however, is that beyond the numerous shocking and not-so-shocking headlines, Galleon Group, which has been in business for more than 12 years and reportedly managed some $3.7 billion in assets, is winding down and shuttering its doors in the span of a scant 45 days.

“I have decided that it is now in the best interest of our investors and employees to conduct an orderly wind down of Galleon’s funds while we explore various alternatives for our business,” Raj  Rajaratam, the 52-year-old billionaire founder of the firm, wrote in a letter to clients.

It’s not so surprising that the firm is winding down. Indeed, as we hit “publish” on this piece, Galleon had already reportedly liquidated practically all of its holdings, mostly large-cap equities like Apple, Google and Bank of America, but also some not-so-liquid securities traded over the counter or in emerging markets. According to sources quoted by Dow Jones Newswires, the firm is on track to pay out investors by January 1, 2010 — at a profit.

What is surprising is the speed of the closure, not to mention its orderliness.

From the big frauds – Bernie – to others more blow-up-ish in nature like Amaranth, the wind-down period is typically a lot longer than just six short weeks. There are numerous administrative logistics to work out, trades to settle, bank balances to shore up and clear up, audits to conduct and all kinds of other paperwork – particularly when it comes to dealing with billions of dollars. And Galleon didn’t just manage one fund — it managed five different long/short equity funds: Technology, Healthcare, New Media, Communications and Life Sciences.

That’s a lot of positions, trades, books and other stuff to figure out. Plus, investors were allowed to withdraw their money monthly, a rarity in the hedge fund world and even more paperwork to track.

Of course, any fund, no matter how large or small, should technically always be in position to liquidate to meet investors’ redemption requests (as per the requirements of the O.M.), which in Galleon’s case came fast and furious after word of Rajaratnam’s arrest on October 16 hit the wires. Operational due diligence experts the world over would undoubtedly agree that liquidating positions in an orderly and advantageous fashion is clearly a prudent move in terms of protecting investors’ assets and best interests.

Which begs the question: Despite all the headlines and wire taps and cloak and dagger stuff, does the case actually have legs?

On one side, one could argue the firm was anticipating trouble all along, leading it to ensure full capacity to shut down at a moment’s notice? On the other side, one could equally argue that given its multiple billions in assets, long list of institutional investors, solid returns and no prior history of wrongdoing, its ability to quickly and professionally wind itself down is a testament to its broader structure.

Galleons were large multi-decked sailing ships used mainly by European countries from the 16th to 18th centuries for war, commerce, and much in between. Clearly this case will eventually reveal whether this particular Galleon and its rapid wrap-up were the result of deft maneuvering or an SEC-shot blow to the bow.

For now, it is all fodder for thriller and conspiracy authors, this one included.

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