Business | Markets
Hedge Funds face fresh round of uncertainty
The hedge fund world, already reeling after investors withdrew money at a breathtaking pace in November and December, is braced for a further exodus by the end of March.
- By Henny Sender/Financial Times
- Published: 23:58 January 6, 2009
New York: The hedge fund world, already reeling after investors withdrew money at a breathtaking pace in November and December, is braced for a further exodus by the end of March.
The collapse of what Bernard Madoff described as a Ponzi scheme has only fuelled the fears that were already haunting hedge fund investors.
And the alleged Madoff scandal is likely to aggravate dark predictions about the fate of the hedge fund industry. In mid-November, at hearings in Washington, legendary investor George Soros said he thought the industry would probably shrink by 75 per cent as a result of the combination of losses and withdrawals.
Investors who had counted on profits from their Madoff investments to raise money to meet margin calls elsewhere will have to sell other holdings to meet those calls.
Moreover, investors who already had withdrawn money from Madoff are faced with uncertainty about whether they may have to hand some of that money back, even though that will not happen until after years of legal wrangling.
Many investors are also concerned about the quality of due diligence in many of the "funds of funds" that had money with Madoff.
That is especially true of those such as Fairfield Greenwich that charged their investors hefty fees for the privilege - as much as 20 per cent of the performance gains.
Such fees, typically added to the fees of the hedge funds in which they invested, are usually justified on two grounds: the ability to put investors into the most exclusive, sought-after funds that are normally closed to new investors, and the promise to monitor carefully what the hedge funds do with that money.
In many cases, moreover, these funds that then turned over the money to Madoff had few requirements in the form of minimum performance before the fees they charged investors kicked in.
Investors are also concerned about the due diligence of the wealth management arms of banks which took client money and placed it with those fund of hedge funds.
The concern about a racheting up of pressure on the hedge fund community comes as hearings began in Washington on the capital markets subcommittee of the House of Representatives' financial services committee to examine regulatory failures in the Madoff affair.
Those hearings will be closed watched by those looking for scapegoats and possible deep pockets for compensation.
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