Geneva Funds of Hedge Funds as­sets fall 60 per­cent

The Pak Banker - - Company& -

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

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