By Susan Barreto
investors are still assessing the education they have had at
the hands of the hedge fund industry. And unfortunately some
are still doing their homework.
Ten years plus of chronicling investors’
adventures here at InvestHedge has revealed the ups and downs
of the swings and slides during investors’ recess
time in the playground of global markets.
Perhaps the hardest – and arguably the best
– lessons learned in the hedge fund playground surely
include the equity crisis after the tech bubble, the fraud
legacies that started with Bayou, via Petters and the
spectacular finale of the Madoff Ponzi scheme.
The playground fist fights, name calling and even some
old-fashioned mud-slinging, included the Amaranth blow-up,
Lehman and credit collapse, as well as the placement agent
scandals that were rife in the US. Just when the investors
thought it was safe and the bullies were under lock and key,
Galleon hit the headlines.
Making friends on the playground has been a struggle.
Investors coming to terms with their attendance at the school
of hard knocks are likely to help future hedge fund allocators
as they themselves learn the best lessons by having skin in the
game as they make their way to the classroom.
When it comes to fighting the good fight many investors have
headed off to the court rooms and have had some mixed results.
For example, over the summer there was talk that shares in
Madoff feeder funds on the secondary market were being bought
and sold for 70 cents on the dollar as some investors were
expected to be made 100% whole.
It seemed that some outstanding lawsuits filed by the Madoff
trustee Irving Picard were going to be successful, but that has
not been the case as a new round of liquidations is only just
Credit investors have slugged it out on the teeter totter as
Europe and the US deal with sovereign debt crises. At Houston
Municipal Employees’ Pension System, the credit
crisis came home to roost in late 2008.
Earlier this year the $2.5 billion pension fund sued
Highland Capital over its Highland Crusader Fund, which the
pension fund claims was harmed by not being managed in the best
interests of the partnership and its limited partners. Highland
says it is one of the fund’s largest investors and
continues to maximise Crusader’s performance,
helping to nearly double the fund’s value over the
last two years.
In the name-calling category has been the placement agent
scandal that has called into question the hiring process used
by every public pension fund in the US. It has touched a fair
number of hedge fund allocations across the country, most
recently leading some trustees for the Kentucky Retirement
System to question the hiring of a multi-strategy hedge fund
over an original plan to hire funds of hedge funds (see page
The latest US scandal is further south in Louisiana. Three
Louisiana-based pension funds are still waiting to be repaid by
Fletcher Asset Management after their withdrawal notices were
followed up with an IOU from the manager (see page 10).
This almost unbelievable story involves the cold hard
reality of learning to read the fine-print of an investment
contract, something Donna Walker at Sire Management highlights
in her look at investor-unfriendly contracts (see page 64).
While the sum in the Fletcher case is less than $100 million,
it brings with it a new perspective about how investors need to
approach hedge fund expectations.
Then there is CalPERS – taking some notes from the
school yard bully. Officials have focused on realigning
contracts with underlying hedge fund managers to ensure fair
play. The largest US pension fund (see page 18) has taken a
number of years to get the job done and is only now adding new
names to its hedge fund portfolio.
Despite all of this investors can be optimistic they can
ultimately graduate from the school of hard knocks together
even if they sport some scrapes and bruises.