Front Runners Busted

Ashby Monk

In October, David Murray, in his role as Chair of the IFSWF, noted that front running had become a real problem for SWFs:

“Because we are generally large institutional investors, there is the whole community of investment banks, brokers, analysts and others who want to front-run our investments in the market.”

As it turns out, Murray was right to be worried. In a recent high-profile insider trading bust in the Bay Area, it was shown that one individual used inside information to front run two SWFs.

According to SF Gate’s Andrew Ross, Anil Kumar, who is a senior partner at McKinsey in Palo Alto, was arrested for allegedly sharing inside information about pending transactions involving Sunnyvale’s Advanced Micro Devices and two Abu Dhabi SWFs. Based on the information, Raj Rajaratnam made some trades in AMD options.

This illustrates that SWFs, like all large investors, are targets for this type of opportunistic behavior. However, despite Murray’s suggestions in October, I still don’t see transparency as the culprit here; insider trading is the problem. These guys (allegedly) broke the law, and they will pay the price. (It’s also interesting to note that they didn’t even profit from the front running.) So, in my view, this is not an excuse to scale back disclosure at SWFs; it’s a reason to continue cracking down on the abuse of insider information.

On a separate point, McKinsey has some damage control to do here (which it has already started with the removal of Kumar). My experience is that trust and discretion are absolutely critical in forging and maintaining relationships with SWFs. In the short-term, this leak may affect McKinsey’s ability to work with SWFs (either through their clients or as clients of their own).

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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