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When Frank Fu set up his hedge fund a couple of years ago, he decided to go all in on block trades. This seemed like a good idea at the time: While his exit from Laurion Capital Management was acrimonious, his time there was quite augmentative for all sides—thanks to block trades. Indeed, it seemed a pretty good idea after his CaaS Capital Management’s first full year, in which the block-trades and access to initial public offerings they bought—and maybe even a bit of short-selling here and there after a suggestive phone call from a friendly banker—produced a 76% return.

As it turns out, however, it was probably not a very good idea, because unbeknownst to Fu, the year before he left Laurion the Securities and Exchange Commission and Justice Department began taking a little look at the world of block trades to see if, say, shorting the hell out of a name that the equity syndicate desk at, say, Morgan Stanley just floated as one that might just potentially be on the block might well just constitute insider trading, and that said powers that be would one day be diligently plowing through everything ever said to or by Fu in conversation with a block-trading banker. Then starting a block-trading-based hedge fund would seem rather a bad idea, and this sales pitch even worse.

“Due to the breadth and strength of these relationships, CaaS has earned a reputation in the market as the firm that receives an early, if not first, call,” the firm wrote in a recent marketing presentation.

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