Funds, Investors Assess Operations in Madoff Wake
February 2, 2009
Tuckerbrook Alternative Investments said last week that it will provide investors with the daily market values of their hedge fund accounts from administrator Citigroup. In December, Union Bancaire Privée, a Geneva-based fund of hedge funds, threatened to pull out of any fund that does not have independent administrators.
Following the discovery of Bernard Madoff's alleged $50 billion global investment scam, such announcements offer evidence that investors are demanding greater transparency from their fund managers. While the term has often been used to describe heightened disclosure by a hedge fund of its trading activities, transparency is quickly expanding to include third-party analysis. Investors are unlikely to continue taking the word of a fund manager at face value--and they don't want to wait for regulators to solve the problem.
"Ninety percent or more of all hedge fund investments are in commingled fund structures, with only the largest investors having daily accountability through separately managed accounts," said Moses Grader, chief operating officer of Marblehead, Mass.-based Tuckerbrook. "Daily transparency at the client-account level, delivered by a trusted third party is a major step up in accountability to those investors that don't have separately managed accounts."
Whether or not Madoff ran a hedge fund--as he claimed--or a managed account is a point of contention. Regardless, his seemingly stellar returns allowed him to court a network of fund of hedge funds managers and feeder funds that marketed his services. Those feeder funds, which reportedly earned 20 percent commissions on his returns, included Bank Medici, Santander subsidiary Optimal Investment Services and Fairfield Sentry Fund, managed by Greenwich Fairfield Group.
Asleep at the Wheel
Michael Levas, president of Olympian Capital Management, a long-short equity hedge fund manager in Fort Lauderdale, Fla., said that Madoff's activities could have been prevented, or at least discovered sooner, if investors had performed due diligence. "Investors were asleep at the wheel," asserted Levas. "They accepted all of the information given by Madoff and did not ask for corroboration from independent service providers--separate prime brokers, fund administrators and accountants."
In a study released Jan. 22, Riskdata, a provider of risk management services to the alternative investment industry, said that its quantitative analysis of Madoff's returns and the risk profile of his so-called "split strike conversion" option trading strategy immediately raised red flags. Madoff traded options on blue-chip companies and the Standard & Poor's 100 Stock Index; he also used puts and calls on the index contracts.
Riskdata said that the Bias Ratio, a methodology for detecting manipulation of returns, for Madoff feeder fund Fairfield Sentry was abnormally high. "While the Bias Ratio may not detect all types of fraud, along with risk profiling it is a very accurate instrument to check the likelihood of posted returns and verify the consistency of actual performance versus manager statements," said London-based Riskdata in the report. The company also noted that Madoff's exposure to interest-rate, equity and volatility factors were inconsistent with his advertised strategy.
"Independent risk management is the key to successful investment and needs to be independently assessed at all levels," said Riskdata CEO Ingmar Adlerberg. "A minimum checklist of risk indicators should be required by investors, who in turn should be equipped with the necessary tools to verify and challenge managers' reports."
