Say goodnight, Walter

A reader alerts me that Walter Noel’s Fairfield Greenwich Group has taken down its website – or at least its wonderful due diligence page in which it promised to investigate anyone they entrusted money to. Sadly, when I wrote on December 14, 2008 about FGG’s complete failure to conduct due diligence on Bernie Madoff I linked to their site, rather than make a copy of the page and post that. So the link’s now defunct. Oh well, I’m sure it will show up in court pretty soon.

UPDATE: Here it is, thanks to Google’s cache system. Just to make it doesn’t get lost again, Walt, ‘m posting it on my site – fewer accidental erasures, don’t you know.

This is Google’s cache of https://www.fggus.com/guest/due_diligence.html. It is a snapshot of the page as it appeared on Feb 15, 2009 05:10:40 GMT. The current page could have changed in the meantime. Learn more

These search terms are highlighted: fairfield greenwich group  

FGG’s Due Diligence Process

FGG’s due diligence process is deeper and broader than a typical Fund of Funds, resembling that of an asset management company acquiring another asset manager, rather than a passive investor entering a disposable investment.

A number of areas of inquiry are examined by a team of FGG professionals who specialize in evaluating respective areas of risk. Typically, a manager has been investigated and monitored for six to 12 months before that firm can be accepted onto the FGG platform. Long negotiating periods enable FGG to be more confident of its decisions before proceeding with a manager. Areas of examination are centered around the following:

1. Portfolio Evaluation, Investment Performance, and Financial Risks:

A core area for further analysis is to attempt to dissect and further understand investment performance, how a manager generates alpha, and what risks are taken in doing so. As portfolio management and risk management incorporate elements of both art and science, FGG applies both qualitative and quantitative measures. FGG:

  • Examines independent prime broker trading records
  • Conducts detailed interviews to better understand the manager’s methodology for forming a market view, and for selecting and exiting core positions
  • Analyses trading records
  • Conducts a number of qualitative and quantitative tests to determine adherence to risk limits over time
  • Confirms portfolio loss risk controls, diversification and other risk-related control policies, as well as any experience regarding unexpected or extreme market events
  • Reviews the risk and return factors inherent in the strategy
  • Evaluates capacity issues, which may affect alpha, as well as expected opportunities going forward within each candidate’s strategy
  • Analyses the various drivers underlying a particular portfolio’s risk
  • Evaluates credit risk and market risk both at the instrument and portfolio level
  • Assesses the extent to which leverage is used by a manager, as well as how it is used, the funding sources, and the impact on the risk profile of the fund
  • Investigate whether or not private or special registration securities are held, and determine how the daily trading volume and inventory held compares to the float and/or daily trading volume for a given security

FGG also conducts many quantitative reviews of investment performance in light of:

  • Fees and fee structure
  • Historical draw-downs
  • Return volatility
  • Commissions earned
  • Performance return in calm versus volatile markets
  • Current/historical correlation of the fund under consideration with standard industry benchmarks, peer groups, and other FGG or competitor funds used as benchmarks

FGG attempts to understand the return attribution for individual securities in the portfolio, and conducts a full suite of VaR analyses and stress tests to model the loss distribution function under extreme market scenarios. Leverage, concentration limits, and long/short exposures are examined over time to assess whether they have remained within operating guidelines.

Style fidelity is another key area of inquiry; the manager’s trading pattern over time and through various market environments, FGG determines whether the manager is prone to trade outside of their area of expertise.

2. Personal Background Investigation:

FGG examines the abilities and personalities of the individuals involved in managing the fund through extensive interviews, as well as background investigations.
FGG verifies:
Education
Personal credit standing
Litigation and regulatory background
Track record
Other indicators

FGG explores the manager’s experience and qualifications relative to the strategy being managed. Prior professional associations of a manager’s key personnel can be crucial in understanding a person’s experience and character and how they run their investment management business.

3. Structural and Operational Risk:

“Operational risk” refers to the risk of loss resulting from inadequate or failed internal processes, human resources, or systems, or from external events.Operational failures, including misrepresentation of valuations and outright fraud, constitute the vast majority of instances where massive investor losses occur. Other operational risks include staff processing errors, technology failure, and poor data.

Pricing models, as well as the adequacy, independence, and transparency of valuation procedures, contingency plans, and other trading and settlement procedures are all matters for close scrutiny by FGG professionals.

FGG seeks a sound understanding of whether a hedge fund possesses key controls in the areas of portfolio management, conflicts of interest, segregation of duties, and compliance. FGG carefully assesses the controls and procedures that managers have in place and seek to determine actual compliance with those procedures, often suggesting modifications, separations of responsibilities, and remedial staff additions.

4. Legal, Compliance, and Regulatory Risk:

FGG’s legal, compliance, and accounting teams specialize in investment management regulation, securities compliance, corporate operations, and tax issues. Hedge fund managers function within an ever more complex legal and regulatory landscape, and the role of this part of the diligence exam is to determine the seriousness of any deficiencies in this area which may cause risk of sanction, loss, or reputational embarrassment.

Both in-house and retained legal professionals interview the management and staff of the manager, research regulatory filings, and review corporate organizational documents, as well as fund memoranda and related material contracts.

11 Comments

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11 responses to “Say goodnight, Walter

  1. Retired IB'er

    Chris,

    Google is your friend. Cached page if you search Fairfield Greenwich Group + due diligence. Here is the link:

    http://209.85.173.132/search?q=cache:YEmwBLr9f3UJ:https://www.fggus.com/guest/due_diligence.html+Fairfield+Greenwich+Group+%2B+due+diligence&hl=en&ct=clnk&cd=1&gl=us

  2. Walt

    Chris, Chris, Chris-
    Now you are pissing me off. What did I do to you homie?
    I did due diligence on Bernie harder than a proctology exam. He was as cool as a cuke, and had all the right moves. I asked all the right questions, and kept my cool when he tried to hook up with a filly. He is way to old for them. But you Chris, may not agree. And the filly’s are off base for you as well. And I do need anti ass sand for my butt. It’s killing me.
    Your buddy,
    Walt

  3. Blind Brook

    OK, Chris, let’s do a Walter and Monica conversation right now at Yemenja in Mustique. I’ll start:

    Ext: Terrace, Yemenja, Mustique.

    Gaunt Brazilian pesants in pressed white jackets carry heavy trays of silver to the breakfast table where we find Walter and Monica Noel

    Monica: You idiot. You’ve ruined me. I don’t give a if you rot in prison, you old man, but I have a future, and it better not be Bedford Hills.

    Walter:

  4. Walt

    Blind Brook -
    Get a life.
    The rest of you all -
    WAKE FRIGGIN UP. Come on, you all knew the deal. We ALL thought Bernie was cheating, but we wanted on the Gravy Train. Hey, we are from Greenwich – we don’t have to play by the rules. We MAKE the rules. Paying taxes is for little people. Thank you, Leona – you got it, God rest your soul. The rest of you whiners, you still don’t.
    We ALL knew Bernie cheated, which was fine, until he cheated US!!! Then it’s a problem. But not until then. You want the truth? You CAN’T HANDLE THE TRUTH!! (Thanks Jack – still a classic)
    So cut it with the due diligence crap. You wanted to be on the inside. So I got you in. You didn’t buy due diligence, whatever that is, you bought preferential treatment. Which you think is your birthright. And now you find out it’s not, because Bernie gave you kick in the ass.
    Anyway, sorry to start the day with a rant. It’s Bloody Mary time on the veranda!!
    Fondly,
    Walt

  5. James

    These guys should be in jail alongside Bernie. Fairfield was a joke! The way to do proper due diligence isn’t a secret – a book just came out describing (in detail) how it’s supposed to be done called “Hedge Fund Operational Due Diligence” by Jason Scharfman. (http://www.amazon.com/Hedge-Fund-Operational-Diligence-Understanding/dp/0470372346)

    Maybe Walter and Bernie can read it to each other in their prison cell!

  6. Inagua

    That document should be required reading for every member of the Board of the Round Hill Club. What kind of people are willing to associate with someone who lies on such a scale?

  7. Walt

    James & Inagua -
    Douche bag says what? Buy a book on due diligence? Are you insane? We knew how to do it, we just didn’t bother. You want to buy a bridge?
    The Board of Round Hill. That’s sweet. It shows you think that matters. They are as stupid as the rest of us. They just don’t know it. And you, Inagua, seem to think people on the Board of Round Hill are special too. I don’t lie. I sell people what they want to believe. So if the Round Hill Board is so special to you, I can sell you a bridge as well.
    Now Chris, will you please get me that Bar what’s her name contact data? Business sucks.
    Fondly,
    Walter

  8. Lol, this is too great. Thanks for that book referral James. Did you see the piece the author’s firm put out? (http://www.corgentum.com/research-tenquestions.html)… by the way Mustique nice!

  9. NP

    Mark Patinkin posits that Walter Noel was more in it for the glory than the money. Interesting thought – but I’d guess Walt is glad he took some money from his clients too – I don’t know how far glory goes towards paying the astronomical legal bills Mr. Noel is facing.

    “And Madoff couldn’t have done it without help from supposedly upstanding investment managers equally addicted to glory, like Walter Noel, principal of the Fairfield Greenwich group in Connecticut.”

    http://www.projo.com/lifebeat/content/Mark24_02-24-09_LNDCAN8_v13.25669bc.html