FORTUNE — When Bill Hwang decided to shutter his Tiger Asia hedge fund in response to an ongoing insider trading investigation, he became part of a small group of money managers who have closed down amid regulatory scrutiny. Arthur Samberg wound down Pequot Capital Management in 2009, when the Securities and Exchange Commission began a second investigation of his firm; and David Ganek closed Level Global amid an ongoing insider trading investigation.
But these well-known closures are not the norm. “If everyone who was under investigation at any one time shuttered, the population of asset managers would be materially decreased,” says Ron Geffner, a former SEC prosecutor who now provides legal advice to hedge funds as a partner at Sadis & Goldberg.
One reason why funds may want to operate while under government scrutiny: it gives them a cushion they can use to pay expenses. Most partnership funds stipulate that managing members will be indemnified against legal expenses incurred as part of events like a government investigation. “Most investors don’t understand — and would not like — the fact that they can bear the financial burden that comes with cooperating with subpoenas and investigators,” says Peter Rup, chief investment officer at Artemis Wealth Advisors. “I know of one fund that spent $1 million just complying with subpoenas.”
While Tiger Asia is allowed to shield managers from legal costs, a source close to Hwang says that no investor money has been used to comply with the Securities and Futures Commission of Hong Kong’s ongoing, three-year insider trading investigation into the firm. The SEC has also requested trading records and documents from Tiger Asia.
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In another high-profile insider trading investigation, David Einhorn and his firm Greenlight Capital were fined about $11.2 million by UK financial regulators. In a statement about the case, Einhorn emphasized that he and Greenlight would pay the fines and legal costs, not investors.
But Rup says that it’s unusual when a manager decides to be personally at risk for the cost of investigations, as Hwang and Einhorn have done. “If Hwang is found to have done nothing wrong and he has a good track record, then there is no reason capital won’t return to him,” Rup says. “In this case, he’s showing that he’s acting as a fiduciary on my behalf.”
Hwang, who was seeded by hedge fund legend Julian Robertson, did put up some very good numbers. According to a letter sent to investors, Tiger Asia produced a net annualized return of 15.8% from inception in January 2001 through July 2012. During the same period, the average annual return for the S&P 500 was 2.3%. (That record did not keep investors from fleeing Tiger Asia due to the investigation. His assets peaked at about $3 billion in 2010 and currently hover around $1.2 billion.)
No matter what happens with the Tiger Asia probe, it’s also possible that Hwang may not want to return to running a hedge fund. “We’ve seen that for some very wealthy managers, the burden of dealing with regulators outweighs the benefits derived from managing the assets of others,” says Geffner.
Duquesne Capital founder Stanley Druckenmiller, Atticus Capital founder Tim Barakett, Shumway Capital’s Chris Shumway, and Carl Icahn have all returned money to investors so that they can just invest their own money. But if Hwang can prove his innocence and decides that he’d like to manage outside money again, he may have created plenty of goodwill simply by returning capital now.
