Posts filed under “Hedge Funds”

Hedge Fund Partners vs Managed Account Investors

Today’s NYT (and Monday’s WSJ) each have articles which compare Madoff investors with those of recent $400 million dollar hedge fund fraud Bayou Group.

I believe this misunderstands the applicable law of partnership, fraud, and investing.

Hedge fund investors are limited partners, and as such, they have a fiduciary duty to their other partners. Regardless of the additional due dilly, the gut instinct, or any other basis one investor had when they pulled their capital, the Bayou case grants the other LPs the opportunity to clawback that money.

That was the Bayou decision — one I disagree with, but its the law (for now).

Managed account investors have no such legal obligation. Indeed, some people have argued that the doctrine of fraudulent conveyance might apply. But that requires that the investor who pulled money out of Madoff knew it was an illegal Ponzi scheme, and that their transfer of property was illegal and done with the intent to commit fraud.

Merely pulling money out of what you legitimately believe is your own brokerage account hardly qualifies as the appropriate mental state for fraud . . .

>

~~~

UPDATE: December 20, 2008 6:32am

Let me clarify one thing — I assumed that some of the investors were actually investors, and that the Ponzi scheme didn’t start until much more recently (5-10 years).

If its the case that the entire operation has been a scam from day one, well then, all bets are off. That is a different story. Whatever proceeds and withdrawals there were may simply be the proceeds of illegal activity.  Then you may not get to keep anything, and there is a pro-rata redistribution of all assets.

But I strongly suspect that much of the early years were legitimate investing. My best guess is he went Ponzi to hide a bad quarter, and it snowballed from there.

>

Sources:
Even Winners May Lose Out With Madoff
Investors May Have to Surrender Gains
JANE J. KIM, JENNY STRASBURG and AARON LUCCHETTI
WSJ, DECEMBER 15, 2008

http://online.wsj.com/article/SB122930184908605505.html

Even Winners May Lose With Madoff
ALEX BERENSON
NYT, December 18, 2008

http://www.nytimes.com/2008/12/19/business/19ponzi.html

Category: Hedge Funds, Legal, Regulation

Vast Under-Investment in Due Diligence

With everyone tsk-tsking the Madoff scandal — the amount lost, the after-the-fact obviousness, the SEC incompetence — I thought now was as  good a time as any to look at the actual research, due diligence and manpower thrown at investigating managers and funds. Not surprisingly, it is tiny — at least, when compared with the…Read More

Category: Bailouts, Hedge Funds, Investing, Legal, Regulation

Why Do Fund of Funds Exist

Here’s a question for you: What is the actual purpose of FoF ? In theory, they are supposed to do the due diligence, the forensic accounting, the deep background checks that ordinary investors cannot. Then once they identify a group of funds they want to allocate capital too, they are supposed to run the asset…Read More

Category: Bailouts, Hedge Funds, Investing, Legal

Be Wary of Serial Correlation

MIT’s Andrew Lo: The key concept here, developed by MIT professor and noted hedge-fund theorist Andrew Lo, is “serial correlation.” Simply put, serial correlation is the degree to which each month’s returns in a fund mirror the results of the month before. A fund that returns the exact same amount every month is perfectly serially…Read More

Category: Hedge Funds, Legal, Markets, Mathematics, Quantitative

Harvard: Not So Smart After All

We interrupt the GM hearings for this brief moment of schadenfreude: Harvard’s endowment has now blown through over $8 Billion, or 22% in the last four months. Correct me if I am wrong, but wasn’t Harvard’s endowment outperforming the broad indices for a long time? And didn’t their Board of Trustees fire/replace/chase awayt hese outperforming…Read More

Category: Hedge Funds, Markets, Really, really bad calls

MODELS & THE RISK OF RUIN

Bill Werner is an Engineer in Missouri City, Texas. The following is his review of this year’s “worst call” and an attempt at drilling down to the ultimate problem. ~~~ > “You will see when you can swallow the world in one gulp.” -Zen Aphorism > My submittal for the worst call is that “housing markets…Read More

Category: Bailouts, BP Cafe, Hedge Funds

Hedge Fund Performance by Strategy

With 6 hedge fund managers — Philip Falcone, Kenneth Griffin, John Paulson, James Simons and George Soros — testifying before the House Committee on Oversight and Government Reform today, it might be a good time to look at how various strategies have been performing. What hedge fund strategy has yielded the best relative performance? Not…Read More

Category: Hedge Funds, Markets, Politics, Trading

Charlie Rose: A conversation with Bill Ackman

A conversation with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP.

>

>

Source:
A conversation with Bill Ackman
Charlie Rose, Tuesday, November 11, 2008

http://www.charlierose.com/view/interview/9498

Category: Derivatives, Hedge Funds, Markets, Video

When Genius Failed

A financial firm borrows billions of dollars to make big bets on esoteric securities. Markets turn and the bets go sour. Overnight, the firm loses most of its money, and Wall Street suddenly shuns it. Fearing that its collapse could set off a full-scale market meltdown, the government intervenes and encourages private interests to bail…Read More

Category: Bailouts, Books, Derivatives, Hedge Funds, Markets

Andrew Lahde: Goodbye!

Now, this is how you close a fund!

Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866% betting on the subprime collapse. Last month, he took his ball and went home. Tired of the stress, he closed the fund.

Today, Lahde passed along his "goodbye" letter (via FT Alphaville and Portfolio.com), a snarky "Up Yours" to those who do deserve it.

Enjoy:

Read More

Category: Hedge Funds, Psychology