Investors in hedge funds and funds of funds and the individuals and institutions that advise them are responding to the Bernard Madoff scandal by reviewing the mechanisms available to moni
Investors in hedge funds and funds of funds and the individuals and institutions that advise them are responding to the Bernard Madoff scandal by reviewing the mechanisms available to monitor funds, their managers and promoters.
Swiss bank Union Bancaire Privée, whose clients faces losses estimated at USD700m through funds of funds and managed accounts that invested with Madoff, is threatening to withdraw assets from US hedge funds – even those run by blue-chip manager such as D.E. Shaw, SAC Capital Advisors and Renaissance Technologies – that don’t use fully-fledged independent administrators.
One hedge fund manager with which UBP invests, Millennium Management, has already moved to appoint an independent administrator, recognising that for investors this represents an added safeguard against fraud or mismanagement on the part of the managers, because the administrator conducts independent valuations of the fund’s assets and seeks to verify the data provided by the custodian of the assets.
According to the Wall Street Journal, the move by UBP to require managers it invests with to use independent administrators is particularly significant because, through its funds of hedge funds and clients’ managed accounts, it is one of the world’s largest investors in hedge funds, with USD124.5bn in assets at the end of June.
The move largely affects US funds, particularly longer-established ones; the vast majority of European managers use independent administrators as a matter of course, and it is already a precondition for many investors there.
If other investors follow UBP’s lead, it will be good news for hedge fund administrators at a time when for many assets under administration, and hence fees, might otherwise be shrinking, and also for well-established centres of the business such as Ireland and Luxembourg, as well as perhaps, for all the opprobrium currently surrounding offshore financial activities, jurisdictions such as the Cayman Islands and Bermuda.