Millennium Hedge Fund Putting Up Legal Reserve

"We weren't even aware that you could actually do that," the investor said of late-trading, in which fund shares are bought at stale prices set prior to the disclosure of market-moving news. "We weren't aware that you could get away with something like that. I'm sure people who knew that strategy better than we did had some more ideas about it, but we were never aware of what was being done."

Millennium's communications with investors have never been particularly voluminous, according to one investor, who said the quarterly reports the firm issued eventually stopped describing the allocation of each fund to different strategies. Recent reports included only "a whole bunch of statistics" that left investors to figure out how much of the fund was dedicated to statistical arbitrage, merger arbitrage or market-timing of mutual fund shares.

"It's not their style to send out letters," the investor said. "It's not like you'd know people in the company. The idea was this was Israel Englander's fund and you trusted him."

Englander, a 1980s Wall Street contemporary of Ivan Boesky and a former partner of John Mulheren, started the hedge fund in 1990 with $13 million and backing from the Belzbergs, the Canadian family that made its money in finance, real estate and other businesses. Millennium fared well from the outset, and established an 18% average annual return over its first 10 years.

This gave Millennium both cachet and the freedom to set terms for its investors that some may now regret.

From at least 2000 onward, investors had to pony up a minimum of $5 million to get one of a number of limited partnership slots. The law limits hedge funds to 499 investors who generally make minimum investments of $1 million, or 99 investors who commit at least $5 million. Because hedge funds generally charge 1% annual management fees, they often have an incentive to maximize the amount of money they control, and investors with less money are sometimes turned away.

Millennium had the returns and the clout to set the bar high.