Post-Madoff Hedge Fund Phenomenon: Some Players Start Their Own Funds

It’s fair to say that the Madoff situation has added insult to injury for the hedge fund industry and may have prompted some hedge fund investors to finally capitulate. The New York Post recently wrote:

Now the worry is that hedge-fund clients will use the scandal as a final reason to pull money from even solid-performing managers. Although Madoff technically did not run a hedge fund, the structure of his $17 billion asset-management operation was similar to some hedge players.

“What’s more, Madoff’s ties with hedge fund of fund mangers, who placed their clients’ money in his advisory business without doing the kind of due diligence that might have uncovered the alleged scheme, has further eroded confidence.

But wait…

But with many Madoff assets coming from private banks, there may be a schism developing within the ranks of institutional hedge fund investors. Public pension plans may not be running for the hills, says the WSJ:

Hedge funds have suffered through their worst year in more than a decade, punctuated by the Bernard Madoff scandal. But some public pension funds aren’t writing them off, at least not yet.

Chief investment officers for pension funds note that despite some worrisome drawbacks, hedge funds continue to outperform stocks, and by a good margin. Hedge funds are down less than 18% this year, while the Standard & Poor’s 500 index has dropped close to 41%.

Buy vs. Build

Pensions & Investments recently found that European pensions remain solidly focused on absolute return strategies despite the Madoff saga. In fact, P&I reports that several European mega-pensions are actually launching their own internal hedge fund operations to overcome the types of transparency issues raised by the Madoff fiasco:

Driven by inadequate transparency, performance problems and redemption issues among external hedge fund managers, pension fund officials at the 367 Danish kroner ($69 billion) ATP pension plan and the €23 billion ($32 billion) Ilmarinen Mutual Pension Insurance Co. - a multiemployer [FInnish] pension fund - are quickly building their own hedge fund expertise.

Also, Hermes Investment Management Ltd., London, which manages the £34 billion ($52 billion) BT Pension Fund, is also preparing to launch its own hedge fund team as soon as early next year. As a result, billions of dollars in absolute-return strategies from these three funds might be shifting in-house.

These investors have opted to keep the baby (alpha-centric investment strategies) while throwing out what they see as the dirty bathwater (an opaque and illiquid hedge fund business model).

“Dislocations” too juicy to resist

Over the past couple of months, a growing chorus of hedge funds has been suggesting that recent market dislocations are good news for alpha-centric strategies in the medium and long-term. And this may not just be empty marketing. According to P&I, institutional investors are sensing the same opportunities. Thomas Gunnarsson, the co-chief investment officer for alpha at Danish plan ATP tells the newspaper:

There are tremendous dislocations in the industry, among them in the credit and convertible (bond) space. Going forward, there is going to be a lot of opportunities … We’re trying to develop in-house expertise to place us in a better position to take advantage of those opportunities.

Pensions competing with traditional hedge funds? Just another example of why it’s not about hedge funds, mutual funds, or pension funds, it’s all about alpha.

Hedge fund outflows vs. mutual fund outflows

In a related story, FT reported this week that November hedge fund asset outflows topped out at $32 billion according to Trimtabs. When you add this to HFR’s Jan-Oct net redemption figure of $43 billion, you get $75 billion or about 3.75% of YE ‘07 AUM.

Also this week, the Investment Company Institute (ICI) reported mutual fund asset flows for November - providing some interesting perspective on these numbers. While assets in US mutual funds were down by $261 billion in November, only $41 billion of that was from net redemptions. The rest was from negative returns. For the year to November 30, investors pulled $197 billion out of US mutual funds or about 1.6% of YE ‘07 AUM. For stock funds, Jan-Nov redemptions were about 3.3% of YE ‘07 AUM.

That’s not too far from the hedge fund figures above, suggesting that hedge fund redemptions - at least so far - are comparable to US stock mutual redemptions. But before the hedge fund industry breathes a sigh of relief, it should check out Trimtabs’ December hedge fund redemption forecast (cited by the FT): $80 billion.

If the New York Post is right about the Madoff scandal providing a reason to pull money out of hedge funds, that number could be at the low end of the range. After all, it appears that well over $20 billion could have been instantaneously sucked out of the industry on December 11.

Comments

[kotika98:]

nice article, until the last paragraph - hedge funds have notification periods of at least 30 days and perhaps more. This means two things, first managers knew the exact figure back in November and, second, certainly raised cash to meet the redemptions way back then.

Jan 02 08:18 AM

[Anonymous 2:]

Am I missing something?
Is it not on all Due Diligence check lists - "BASIC PRE investment due diligence" - to ask for & demand a copy of the most recent AUDITED annual report by a recognized CPA firm?
How many of the (so far) publically "named investors" in Madhoff - prior to their investment - asked to review the most recent audited returns of Madhoff?
How many received and reviewed any audited report?
Another point not yet seen (by me at any rate):
What were the estimated dollars invested with Madhoff at year end 2007 and what was the most recent estimate of "current value" of assets under management prior to the revelation of the news in early December?
And did Madhoff have any 30 or 45 day or whatever notice period?
And how far back does "the street" expect that past investors who withdrew their funds over the many past years (decades??) of operation will have to return their withdrawn funds to a "pool" from which everyone else - the most recent investors - will hope to recover some of their initial invested capital?
------------
By the way - an other subject - to what extent do shareholders and employees of a publically held NYSE company have a legal reason/right to expect the most senior management to be held to certain minimum standards of prudent oversight of the strategic as well as day to day workings of the company for which these Board Chairman and or CEO, COO, and CFO level managers are responsible to their shareholders and employees
The press has reported a multitude of instances of such gross negligence during these past 12 months - I am surprised that we have not seen any legal actions taken to recover damages from such irresponsible managers - many of whom are no longer with the companies since the companies have either gone under or have been merged with surviving companies. BUT in ALL CASES, these managers have benefited from HUGE salaries and retirement benefits in the tens and hundreds of millions of dollars - not fair to the employees and shareholders who should be able to expect that the senior mangers of their company are HELD ACCOUNTABLE for acting in a responsible way to maintain a healthy and competitive company. These managers should not be able to able to retain the salary and retirement benefit compensation packages they did not earn if found guilty of NOT managing the corporate affairs of the company.

Jan 02 04:43 PM

[Diane Graziano:]

1)Weak analysis:IAmt. of withdrawal is only part of analysis:
Who withdrew?Potential "influencers" of US debt purchases?Connect the "chain".
2)RE:Maduff:Statistica... reasoning:When investors/attorney's asked SEC re; Maduff and were shut down,what would be next course of action?Contact the FBI (10,000 agents) or a AUSA (8,400/93 Offices),I would say so.How many "enforcers" "googled"-"Maduff"?How many e-mailed to each other?How many electronic transmissions from 1998-2008 re: the schemes throughtout the US financial services industry?The USDOJ is a "revolving door",fact.How many former US Attorney's/AUSA's moved to "wall street" representations?How many federal judges were tied into wall street?Was the 'invisible CIA monies" tied into wall street?There are brilliant clusters of savvy minds worldwide who may not be as "rich" as Americans in "dollars" but are wealthy in intellect and can use the ww electronic net as well as Americans..I forecast the market downward by
30% in 2009.The "up's" are purely wall streeters and group in a desperate mode to save their jobs,period.

Jan 02 05:54 PM

[deepakrocks:]

It is very unfortunate that a securities scandal of the magnitude of $50 billion should unfold especially during the current troubled times. It is surprising as to how this escaped the regulatory authorities all these years. We are learning with every incident and let us learn how to ensure that this type of scam does not recur in future.

Hedge fund industry does require consolidation through tougher regulations by authorities and smarter due diligence from the investors and this crisis is an opportunity for this industry to find a new and robust base and regain its fading charm.

Jan 03 10:42 AM

[Mr Stox:]

Yes it is unfortunate not just for investors but for the hedge fund industry as a whole. Hopefully this will not be its death knell....

Jan 05 07:42 PM

[Jack loach:]

Pictet & Cie.- claim they are the “Rolls Royce”of swiss banks.

Swiss Banks or more correctly Swizz banks.

Swizz. ---- “ a great disappointment.” or a “ fraud.”

Fraud. ---“ an intentional deception or dishonesty.”— “a crime.”

Crime. ---“ an act committed or omitted in violation of a law.”

Serious Crimes .

Conspiring to pervert the Course of Justice.
Perverting the Course of Justice.
Contempt of Court.


The Establishment “ Cover up crimes”.

The ‘Doyens’ of the establishment.’ ( Ivan Pictet and Monty Raphael.)

Ivan Pictet.
Managing partner in Pictet & Cie Bank .--- Switzerland.
President of the Geneva Financial Centre.
World Bank.committee member.
United Nations. Investment Committee member,
Vice President – Global Humanitarian Forum.
Member of the Henokiens.
Blackstone Group --- Board Member.
Past- President – Geneva Private Bankers association.
Past –President – Geneva Chamber of Commerce and Industry.


Monty Raphael.
Quote.” ---- Doyen of U.K. Fraud lawyers.
Consultant & Head of Fraud and Regulatory Dept.
Member of Board of Directors of the Fraud Advisory panel.
Member of the Law Society of England & Wales.
International Bar Association Member.
Past President—London Criminal Court Solicitors Association.
Past Chairman ---of Anti Corruption Committee.
Founder of Business Crime Committee of the International Bar
Association.


Pictet & Cie Bank & Peters & Peters.

The bank and it’s officials deliberately withheld crucial documents requested under a High Court order.The bank and it’s officials deliberately withheld evidence from the Police , and one of it’s account managers Susan Broadhead gave a false witness statement to the police.
Another one of it’s managers Nicholas Campiche ( Now Head of Pictet – Alternative Investments.)concocted a letter pretending to be a client and closed his account. The senior partner (Ivan Pictet.)sought to have numerous documents destroyed,along with those copies held in their London office of P.A.M. Initially stating that they were forgeries then their lawyers Peters & Peters – Monty Raphael – and the barrister Charles Flint.Q.C.) –later had to admit in Court that the documents were genuine.

(1) It is a criminal offence for a bank to knowingly act for an undischarged criminal bankrupt in so far as it seeks to assist that criminal bankrupt in the fraudulent movement of monies. ( Money Laundering.)

(2) It is a criminal offence for a bank to lie to the police and the bankrupts trustee in bankruptcy in so far as any knowledge of, or dealings with the bank was refuted .

(3) A bank can be guilty of Contempt of Court if it fails to comply fully with the Courts order for discovery .

(4) The banks contempt is further compounded if it fails to address its error after it is specifically drawn to the to its solicitors attention. ( Monty Raphael).

(5) It is a criminal offence under the Financial Services Act to seek to destroy evidence that might be relevant to an investigation .

(6) It is a criminal offence not to relinquish control of funds to the Trustee immediately the fact of the bankruptcy is drawn to the banks attention.

(7) It is a criminal offence to lie or otherwise obfuscate the lawful and proper enquiries of the F.S.A.

On Dec 9th,2008. the complaint was sent to 150 Members of the House Of Lords and 230 Members of Parliament.

*** We thank ---David Cameron. M.P. ( Canary Wharf Speech.) Dec. 15th.2008.

(1) Bankers who behave irresponsibly should face professional consequences.
(2) If anyone is found to have behaved criminally they must be prosecuted.
(3) The F.S.A. and the Serious Fraud Office should be following up every lead, investigating every suspect transaction .
(4) We need to make it 100% clear –those who break the law should face prosecution.
(5) That we make sure we root out any wrongdoing that may have happened, whoever is involved ,however high or well connected they may be.

Quote. ( America’s Top Lawyer .)
You can be the richest man in the world with the best lawyers that money can buy but you cannot win against a man who has got nothing left to lose and is telling the truth.

Full Story.
Go to search box on “Google” and insert ( Ivan Pictet / Monty Raphael) or
insert ( Pictet & Cie / Monty Raphael.) - - then try it on “Yahoo”.
Or try (Jack Loach/ Ivan Pictet.)

May 12 04:01 PM