Diamondback Capital Management, the Stamford, Conn, hedge fund that survived insider-trading-related FBI raids in 2010, is shutting down due to an unexpected flood of investor redemption requests.
Despite posting a better-than-average return of more than 6 percent in 2012, investors have asked for withdrawals of $526 million, or 26 percent of the fund, according to a letter Diamondback sent to investors, a copy of which was obtained by The Post.
The withdrawals, set to go out the door at the end of the month, will leave the fund with assets of just $1.45 billion, the letter said. That was evidently too little cash to carry on.
“Rather than continue to manage this reduced level of assets, we have decided that the most prudent course is to wind down and terminate the funds and return investor capital,” the fund’s founders, Richard Schimel and Larry Sapanski, said in the letter.
Schimel and Sapanski founded Diamondback in 2005 after leaving Steve Cohen’s SAC Capital Advisors.
SAC has also been caught up in the government’s insider-trading crackdown. It has not been charged with any wrongdoing but recently received a Wells Notice from the Securities and Exchange Commission — a sign that the regulator is weighing civil charges against the $14 billion firm.
Diamondback, which was raided by the FBI in November 2010, as were other hedge funds and related firms, had roughly $5.3 billion in assets when the feds came a-calling.
Jesse Tortora, a technology analyst with Diamondback, pleaded guilty to insider trading and his former boss, Todd Newman, is currently on trial in Manhattan federal court for profiting from Tortora’s tips.
Diamondback, however, was able to survive after convincing both investors and the government that top management was not aware of the illegal tips, which were coming from tech titans Dell and Nvidia.
Diamondback paid more than $9 million to settle allegations it profited from the trades, and the firm was cleared of criminal charges in a non-prosecution agreement the government granted it when Newman was arrested earlier this year
In the letter, dated Dec. 6, Diamondback’s founders said they have “already begun the process of reducing the funds’ assets to cash.”
They will, however, suspend Dec. 31 redemptions in order to complete the liquidation and return pro rata distributions to all investors.
The founders said they anticipate the majority of investor capital will be returned in January. No management or incentive fees will be charged for January, they said.