Sri Lanka’s stock market has been one of the world’s star performers in 2009, with the Colombo All-Share Index up more than 100% for the year. But one man knocked the exchange back today, casting a cloud over the market’s performance in the months ahead.

Sri Lanka 10-19-09

Raj Rajaratnam, the Sri Lanka-born, New York-based hedge fund manager was one of six people arrested on Friday and charged with insider trading. American federal investigators claim that Rajaratnam was at the centre of an insider-trading ring that also included managers from Intel, IBM and McKinsey.

Rajaratnam’s Galleon Group manages US$3.7bn in assets. The founder’s legal troubles have led many to believe that a wave of redemptions is on the way. As a result, traders in Colombo are worried that Galleon’s sizeable stakes in several Sri Lankan firms may be sold to raise funds. Amid generally rising shares elsewhere in Asia, today the Sri Lankan market recorded its largest intraday drop in five years, 3.8%, before recovering to close lower by 1.6%.

UPDATE (Oct 22): Galleon is closing. The Colombo All-Share has slipped an additional 3% over the past three days.