Have the insider trading scandals profoundly changed the hedge fund industry?

On the surface, there have been some big changes. Many were shocked by the government's aggressive use of wiretaps, and they have moved to invest more in sweep technology to uncover the use of bugs, taps and possibly other surveillance equipment. Others have reigned in their natural impulses. According to the New York Times magazine, hedge fund managers "are plainly frightened of becoming the next target." The last thing they want is to become an SAC Capital-like target, one that is often whispered about and in the news, thought there has yet to be an official action against the company or its executives.

The mere threat has got to be distracting. Some consultants and lawyers are warning funds that the mere presence of high returns will draw regulatory scrutiny. Others say that potentially troublesome sources of information should be reported. The use of expert-network firms has plummeted after several employees of these firms were indicted and then found guilty, by admission or by jury.

Are these profound changes? It's hard to say. It may be that the practice of insider trading is ingrained enough that it will simply move to other more fruitful areas. Insider traders who target stocks--and to a certain extent options---have to contend with a sophisticated set of technologies that can detect various trends and unusual activity. Those technologies do not exist in other markets, like the CDS and other derivatives markets. One group that has watched all this with a just a tad of Schadenfreude is the high-frequency trading set, who have little use for the kind of insider information that the likes of Raj Rajaratnam craved. It's unclear if funds of this ilk can turn that fact into some sort of marketing advantage.

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