Massachusetts pension fund hold $65.6 million in Conn. hedge funds raided by FBI

By Beth Healy, Globe staff

The Massachusetts state pension fund has investments of $65.6 million in two Connecticut hedge funds that were raided by the FBI yesterday as part of a wide-ranging insider-trading investigation, according to a letter to the fund's trustees today.

The exposure was disclosed to the $45.9 billion fund's trustees today in a letter from Executive Director Michael Trotsky. The investments in Diamond Capital Management of Stamford and Level Global Investors of Greenwich are through funds-of-funds, or large portfolios that spread assets across a number of hedge funds.

Trotsky wrote that senior fund staff "have been in touch with our fund-of-fund managers to learn about the investigation and to determine what options are available to us."

He also wrote, "While very few details of the investigation are currently available, our team is working diligently to ensure that we are doing everything we can to avoid a permanent loss of capital."

The state fund has $48.4 million in Diamondback Capital and $17.2 million in Level Global. The fund has no exposure to the Boston firm that was raided, Loch Capital Management, which is run by twin brothers Timothy and Todd McSweeney and known for their technology investments.

Yesterday's FBI raid could ultimately ensnare numerous traders, consultants, and Wall Street firms. Agents arrived at the Connecticut hedge funds and Loch Capital yesterday with search warrants and taking away boxes of documents.

The investigation appears to have sprung from last year’s Galleon Group scandal — the largest hedge fund insider trading case in history — in which that New York hedge fund’s founder and 22 others were arrested on charges involving illegal trades in the stocks of several companies, including Akamai Technologies Inc. of Cambridge. Galleon’s cofounder, Raj Rajaratnam, is fighting the charges.

Both Diamondback Capital and Level Global Investors have issued statements saying they were cooperating with officials.

Insider trading entails trading stocks illegally on corporate information known only to people inside a company and not yet widely disclosed to the public. In the Galleon case, current and former employees of major companies were paid to provide insider information. Armed with such information, investors could profit unfairly.

Steven Fortuna, a former hedge fund manager from Westwood, pleaded guilty to illegally trading shares of Akamai. Fortuna is an acquaintance of the McSweeneys and has been cooperating with authorities, according to published reports. Assets have been flowing out of Loch Capital since the news broke in January of the McSweeneys’ ties to Fortuna.

Timothy McSweeney, a veteran of Essex Investment Management, a respected Boston firm, started Loch in 2003 with a handful of employees, including his brother, and about $20 million to manage. They built the firm to assets of $2 billion and reported in March of this year that the total had fallen to $750 million, according to filings with the Securities and Exchange Commission.