Asian jet fuel discounts at nine-year low
NEW YORK: Bernard Madoff’s sordid legacy remains the stuff of headlines. But his fraudulent scheme altered – and transformed – the hedge fund industry.
As fund lawyer Steven Nadel at Seward & Kissel LLP put it in a recent interview: “Madoff was a huge wake-up call for the entire asset management industry.”
Here are some ways money managers have changed since Madoff was arrested by federal authorities in December 2008:
Middle men fade
Already bruised by losses in the wake of Lehman Brothers’ bankruptcy three months earlier, the middle men who help pick and vet hedge funds for investors fell further out of favour. Many of these so-called funds of funds did business with the con man by steering clients to his firm.
Leery of putting their money at risk, retirement plans, sovereign wealth funds and other investors began shunning these firms to invest in hedge funds directly.
The impact of that has been staggering: Investors have pulled their money from funds of funds for 10 straight years. The industry lost almost a fifth of the money it had pre-Madoff – assets stand at US$647bil as of the third quarter, according to data compiled by Hedge Fund Research Inc. That caused many firms to merge or shrink their businesses.
Among the firms hit hard was Union Bancaire Privee of Geneva. The bank, which was once the world’s biggest investor in hedge funds – and one of the oldest – had invested about US$700mil of client money with Madoff.
UBP’s hedge fund investments have slumped more than 80% since 2007. It now has about US$10bil in the asset class, according to its website.
UBP’s loss has been Blackstone Group LP’s gain. The New Yorkbased money manager didn’t park client cash with Madoff and that helped it lure customers in droves. Blackstone’s hedge fund investments have surged more than three-fold since 2008 to US$80bil, displacing UBP as the world’s biggest investor in the private pools.
The Madoff toll on the industry, however, goes beyond numbers. Twelve days after Madoff’s arrest, a fund of funds executive who had done business with Madoff took his own life.
Asking more questions
The days of investors blindly entrusting their money to hedge fund managers with no questions asked ended.
The process of vetting managers was upended in its entirety – investors started giving much greater scrutiny to the auditors, brokers and lawyers funds had hired. More attention was also paid to the procedures funds put in place in the course of carrying out their business, while manager background and other checks accelerated.
“Madoff’s fraud showed how some investors didn’t have the necessary procedures in place to detect Madoff,” said Nadel, whose clients include hedge funds.
Madoff’s crimes, together with the 2008 financial crisis, changed the culture of hedge funds.
Reeling from record losses after the implosion of Lehman, hedge funds either introduced, or fortified, rules and procedures on everything from trading to accounting to assure jittery investors.
Fewer secrets
Almost since their inception in the 1960s, hedge funds have been shrouded in secrecy.
As private firms, hedge funds had little regulatory oversight. That worked out nicely for the industry since money managers wanted to keep their trades private, while their wealthy clients didn’t want others to know how they got rich.
Post-Madoff hedge funds became much more attuned to the demands of pension plans and other major clients who became a growing part of their investor base.
They increasingly shared details with clients about their trades and investing strategy. Now, managers give investors their view of the markets, industries, and even information about the inner workings of their operations. — Bloomberg SINGAPORE: Asian jet fuel price discounts stand at their lowest December levels in nine years as a supply glut offsets consumption even as the region’s aviation sector booms.
The slump is a mirror image of the steep gains Asian aviation fuel price differentials saw in the first quarter of this year. Then, tight supply lifted them to their highest seasonal levels in a decade.
The cash differentials for jet fuel in the Asian trading hub of Singapore were at a discount of US$1.06 a barrel below benchmark quotes on Monday, the weakest for this time of year since 2009, according to Refinitiv Eikon data.
Cash differentials represent the price buyers are prepared to pay for fuel over or below benchmark values published daily by price reporting agencies.
“Clearly the physical market does not believe that the high prices of jet paper (contracts) are justified,” said Sukrit Vijayakar, director of energy consultancy Trifecta.
“That is what is causing the weakness in the cash differentials.” — Reuters