What will the new term teach investors?

Mon Sep 5, 2011

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When it comes to fighting the good fight many investors have headed off to the court rooms and have had some mixed results

By Susan Barreto

Institutional 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 beginning.

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 11).

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.

ISSN: 2151-1845 / CDC10004H

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