Geneva Funds of Hedge Funds assets fall 60 percent
GENEVA: Geneva's funds of hedge funds are losing assets two years after Bernard Madoff was arrested for masterminding a Ponzi scheme that cost investors as much as $65 billion.
The money invested in more than 180 Geneva-based funds of hedge funds totaled $14.8 billion at the end of October, down 60 percent from the week before Madoff's arrest on Dec. 11, 2008, according to data compiled by Singaporebased Eurekahedge Pte.
Union Bancaire Privée, Banco Santander SA's Optimal Investment Services and Notz, Stucki & Cie. are among at least seven Geneva-based firms that suffered $7 billion of losses from the Madoff fraud. The model the city's banks helped pioneer in the 1960s is broken and faces competition from investments that charge lower fees, said Drago Indjic, project manager at the London Business School's Hedge Funds Center.
"Funds of funds won't explode or implode but slowly fade, death by a thousand cuts," Indjic said.
Managers of the funds invest in outside funds as opposed to directly in the markets.
UBP, whose clients lost about $700 million from holdings with Madoff, reported a 71 percent drop in hedge fund assets to 17 billion Swiss francs ($17.2 billion) in the two years through June. The company agreed Dec. 6 to pay as much as $500 million to settle claims by the trustee liquidating Madoff's bankrupt investment firm. UBP said it doesn't admit any liability in its settlement and declined to comment further.
Genevalor Benbassat & Cie. also is being sued by the trustee. The Geneva-based firm denies the allegation that the firm had prior knowledge of the fraud.
The company, which liquidated its fund of funds positions after Madoff's arrest, has suffered a 76 percent slump in assets under administration and management to 440 million francs, according to Partner Stéphane Benbassat.
"We've spent two years trying to defend our clients who were victims of fraud and now risk becoming victims of the system," Benbassat said. "It's premature to talk about rebuilding the business."
Peter Greiff, a spokesman for Spain's Santander, whose Geneva-based Optimal unit lost $3.2 billion with Madoff, declined to comment.
Larger hedge funds are finding it easier than smaller rivals to attract inflows, said Peter Hegglin, a fund of funds researcher at Mercer Investment Consulting in Zurich.
"As smaller funds are often unable to support the additional expense of building solid operational structures, asset allocators have since Madoff favored investing in larger funds," Yves Mirabaud, managing partner of Geneva-based private bank Mirabaud & Cie., which had no investments with Madoff, said in an e-mailed statement.
While some firms struggle to retain customers, Pictet & Cie., Geneva's biggest private bank, is reporting net inflows into its fund of hedge funds. Brevan Howard and Bluecrest Capital Management LLP, Europe's biggest and thirdlargest hedge fund firms, have opened offices in Geneva this year.
"Clients have become more sophisticated and increasingly bypass funds of hedge funds by investing directly," said Magne Orgland, a managing partner and head of asset management at St. Gallen-based Wegelin & Co., Switzerland's oldest private bank. "Funds of hedge funds are no longer seen as the only investment solution that provides decent downside risk control."
Notz Stucki, whose clients lost a net $270 million with Madoff, said the trend toward single-fund managers may continue for some time before the diversification of funds of funds lures investors back. The firm's biggest fund of funds has attracted more than $500 million since July 2009.
"People are still digesting what happened in 2008," said Marc Hoegger, a managing partner at Notz Stucki. "They look at the whole alternative business, which is in a kind of test phase, as an exotic animal."
Geneva's funds of funds gained by an average 0.32 percent in the first 10 months of this year, trailing the 7.3 percent gain for single-manager funds worldwide, Eurekahedge reported.
Madoff, 72, is serving a 150-year sentence in a federal prison in North Carolina after admitting he directed the biggest Ponzi scheme in history. At the time of his arrest, his account statements reflected 4,900 accounts with $65 billion in nonexistent balances.
Moreover, Hedge funds and large speculators increased their bets on a commodity rally to the highest level since at least 2006 as copper and gold gained to records.
An index tracking speculative positions in 20 commodity futures in the U.S. advanced 8.4 percent from the week before to 1.54 million contracts as of Dec. 7, the highest level since at least February 2006, Commodity Futures Trading Commission data show. The gauge, compiled by Bloomberg, is derived by taking short positions, or bets on lower prices, from long positions.
Commodities tracked by the Thomson Reuters/Jefferies CRB Index advanced 11 percent this year, extending a 23 percent gain in 2009, on demand led by China and as investors bought raw materials as a store of value. Cotton soared 85 percent, silver 73 percent and arabica coffee 54 percent. Hedge funds and institutional investors will put more money in commodities next year as the world economy recovers, Barclays Capital said.
"The current economic environment is clearly positive for risk assets like commodities," Yingxi Yu, an analyst at Barclays Capital in Singapore, said today by phone. "Talk of a double-dip or a recession seems to be fading away."
About 76 percent of respondents surveyed at a Barclays's conference last week in New York predicted a bigger inflow into direct commodity investments next year. New investments this year were $50 billion, the London-based bank said. -Bloomberg