Lodestone Hedge Fund Said to Liquidate After Arrests

The Lodestone Natural Resources hedge fund is being liquidated following the February arrests of two of its founders as part of an investigation into alleged insider trading, two people with knowledge of the matter said.

The $100 million pool, which invests in commodity stocks, is shutting down after U.K. regulators detained Chief Investment Officer Tim Whyte and founding partner Carl Linderum for questioning on Feb. 27, said the people, who asked not to be identified because the London-based firm is private. Neither has been charged with any crime.

“It’s extremely difficult for investors to stay in because of the large operational and headline risk,” said Jerome Lussan, chief executive officer of Laven Partners Ltd., a hedge-fund consulting firm in London. “That’s problematic for a firm with just one hedge fund, because once the assets go they are left with zero. You can’t survive on zero.”

Lodestone joins U.S. hedge funds including Diamondback Capital LLC and Level Global Investors LP in failing to survive an insider-trading probe. Diamondback’s founders said in December they would liquidate the hedge-fund firm after clients sought to pull $4.3 billion, or 74 percent of its assets under management, following a raid by the FBI in 2010.

Whyte, 38, declined to comment on the decision to shut the fund. His lawyer didn’t return an e-mail and phone call seeking comment. Linderum, 36, plans to contest the regulator’s allegations, his attorney, Elizabeth Robertson, said in a March 13 interview. Robertson, a partner at K&L Gates LLP in London, didn’t respond to requests for comment today.

Search Warrants

The U.K.’s Financial Services Authority arrested Whyte, Linderum and a third London trader, GLG Partners Inc.’s Carl Esprey, people with knowledge of the matter said at the time. The regulator, which has since been replaced by the Financial Conduct Authority, questioned the men for several hours before releasing them, the people said. Six search warrants were executed on homes and offices in the British capital and surrounding areas as part of the investigation.

None of the three traders have been accused publicly of any wrongdoing and the FSA didn’t identify the men by name or the firms they worked at when it announced the arrests in a Feb. 27 press release.

Whyte, Linderum and Ben Belldegrun started the Lodestone Natural Resources fund last year after working together at Brevan Howard Asset Management LLP, the $37 billion hedge-fund firm founded by Alan Howard. Lodestone gained more than 8 percent in 2012, according to a person with knowledge of the firm. Hedge funds focused on stocks rose 7.4 percent on average last year, according to Chicago-based Hedge Fund Research Inc.

Regulators Act

Esprey, 34, was a portfolio manager focused on trading the equities of natural-resource companies at London-based GLG, which has hedge funds with $14.2 billion of assets. He had no immediate comment on the investigation today.

GLG’s parent, Man Group Plc, confirmed Feb. 27 that one of its employees had been arrested for “actions as a private individual,” without identifying the trader. Man Group said in a statement that it had suspended the employee and was cooperating with regulators.

Regulators on both sides of the Atlantic have cracked down on hedge funds and other asset managers for trading on illicit tips about companies. The FCA announced last week that it had arrested a 41-year-old man and a 37-year-old woman as part of a separate probe.

In the U.S., more than 80 people have been charged since the Federal Bureau of Investigation and federal prosecutors began an effort five years ago to combat trading on illegal information by portfolio managers, analysts and company employees. A former Diamondback portfolio manager and one of Level Global’s co-founders were convicted by a U.S. jury in December of participating in an insider-trading scheme that reaped more than $72 million.

(Removes reference to corporate entity in first paragraph in story originally published yesterday.)
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