Galleon shutters $3.7 billion hedge fund -- no government bailout required!

galleon-shutters-3-7-billion-hedge-fund-no-government-bailoutGalleon Holdings, the $3.7 billion hedge fund run by accused insider-trader Raj Rajaratnam (pictured), who is now free on $100 million bail, is shutting down. The big reason is that many of its investors -- college endowments such as Colgate University and state pension funds including the Virginia Retirement System, according to Reuters -- are not comfortable keeping their money with a firm whose CEO has been indicted.

Don't you just love it when the free market works? I realize that Wall Street does not have an entirely free market, because when it gets in trouble, the U.S. steps in with $23.7 trillion -- a nice return on Wall Street's $5 billion investment in Washington over the last decade. But in this case, the free market looks to be rapidly hoovering up the little mess left in Galleon's wake.

How so? Bloomberg reports that Galleon has been approached by "unidentified parties interested in buying the firm and an undetermined amount of its assets." This is fantastic news, because Galleon's holdings -- about which I posted -- are largely in publicly traded securities, so there is a market for them. There's also a market for its people -- Reuters reports that they are being heavily recruited.

I am really pleased that there is no need for the government to bail out this hedge fund. But a big reason is that most of its holdings are in publicly traded stocks. If it was heavily invested in illiquid securities -- as are some big university endowments, such as Yale University's -- there would be more of a question about the need to bail out Galleon.

But I remain astonished at why the people who manage endowments and pension funds don't seem to screen where they invest their money. As I posted, Rajaratnam paid a big fine for alleged short selling violations several years ago, but that did not appear to have raised any red flags with Galleon investors.

Nevertheless, I think it's good news that the SEC is cracking down on insider trading; I hope that it indicts more insider traders if it can get the evidence. With 70 percent of market volume being done by flash traders -- who place their orders a split-second ahead of the ones that they intercept on the way to exchanges -- there is a long way to go before the average investor will begin to trust the financial markets.

But a journey of a thousand miles begins with a single step.

Peter Cohan is a management consultant, Babson professor and author of nine books, includingCapital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in the securities mentioned.

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