So far. Early days, says I.
Daily Archives: December 15, 2008
Now that we know that Bernie Madoff’s returns were fictitious, should we expect to see other “hedge funds” exposed? They all claimed to be making huge returns :20% or more, year after year, and I never questioned that (nor did I invest in them, which probably explains my lack of curiosity). But maybe not all those thousands of funds were actually making what they said they were – maybe, like Bernie, they were making it all up. As is now obvious, no one was checking up on them. This could get interesting.
The Times reports on another fund that, like Walter Noel’s Fairfield Greenwich Group, took investors money and instead of managing it itself, dumped it in Bernie Madoff’s coffers and forgot about it (although they didn’t forget to extract their fees).
J. Ezra Merkin took three brief paragraphs last Thursday to notify investors in his Ascot Partners fund that nearly all the $1.8 billion they had given him to invest had instead been entrusted to Bernard L. Madoff, a Wall Street wizard who is now accused of running a huge Ponzi scheme.
Limited partners in the fund are pondering their legal options, including going to court to freeze other assets held by Mr. Merkin and seeking other emergency relief.
“Certainly, a lot of his investors have good reason to be upset,” said Harry Susman, a lawyer in Texas who was flying to New York on Monday to help a group of investors who had retained him in the matter.
The Ascot Partners fund is just one of what is likely to be many that were decimated in the collapse of Bernard L. Madoff Investment Securities.
Mr. Susman said the strategies promised in Mr. Merkin’s documents are a far cry from what he apparently did, placing all of the investors’ eggs in Mr. Madoff’s basket and charging a hefty fee for doing so.
Attorney Susman and his clients may be the first to file claims against their general partner but surely Mr. Noel knows that he’s next. Uneasy lies the head that wears the crown, even if that head is thinking about retreating to Mustique. With Buffy, no less. More pictures here.
Thanks to “Riverside Dog Walker”, here’s a link to a Michael Lewis (“Liar’s Poker”) article on what went wrong on Wall Street. It’s every bit as good as his book, only shorter – 9 pages. read the whole thing.
Or soon will be.
One anonymous reader has taken me to task for seeming to gloat over the misfortunes of Greenwich resident Walter Noel, founder of the Fairfield Greenwich Group and $7.5 billion Madoff dupe. By extension, I suppose we should also feel sorry for Rye’s Tremont Capital Management, who also lost most of their investors’ money. But I don’t, and I think, along with others who have commented, that both organizations should be sued and their principals impoverished,dragged through the streets and left to live in cardboard boxes.
Well perhaps that’s a little harsh but of the two groups who could suffer from this fraud, the investors or the firms they entrusted their money to, I think it’s the latter who should pony up. Here, for instance, is what Tremont Capital has to say about themselves:
Tremont Capital Management is an established leader in the investment management of fund of hedge fund products and multi-manager portfolios. We are dedicated to providing our clients with quality risk-adjusted returns on a consistent basis over the long-term. Within a framework of disciplined risk budgeting and monitoring, we employ a strategic investment approach that is considered as rigorous as it is innovative. Our bottom line is to help our investors achieve their goals through the identification of opportunities to deliver alpha amidst ever-changing market conditions.
Tremont has been at the forefront in setting the standard in the industry for fund of hedge funds investment management. Effective investment strategies and oversight, thorough manager research, careful due diligence, advanced risk allocation and time-tested portfolio management form the cornerstones of a comprehensive platform that has been refined over a 23-year span of dedicated strides to maximize our clients’ objectives. Our established performance history and our focus on client service distinguishes the firm at a time when the influx of new entrants creates choice but not the certainty of experience.
Tremont’s global investor base consists of institutional investors and clients, including financial institutions, public and private pension plans, ERISA plans, university endowments and foundations, as well as categories of high net worth individuals. Tremont employs over 100 people in the United States, the United Kingdom, Canada, and Hong Kong. Our professionals are positioned to identify what we believe are the most able hedge fund managers from across the globe,and provide our clients and investors worldwide with local access to Tremont’s suite of first-class services.
Tremont Capital Management is the flagship fund of hedge funds division of the Tremont Group Holdings, Inc. organization. Tremont Group also manages and offers to sophisticated investors, through its Rye Investment Management platform, a line of select, single manager investment products.
Tremont’s Value-Added Proposition
We believe we add value to our clients’ investment through:
- Strategy-Focused Investment Process– Tremont’s investment teams are organized by strategy. This enables us it to integrate top down and bottom up decision-making to enhance risk-adjusted returns and provide customized solutions for Tremont client needs;
- An Experienced Investment Team– Tremont has a veteran investment team with strong and diverse professional backgrounds;
- Risk Management – Risk assessment is integrated into every aspect of our investment process;
- Global Reach– Tremont’s long-standing global presence; through offices in the U.S., Asia and Europe has provided access to local opportunities and insights globally;
- Strong Infrastructure and Corporate Oversight – Experienced senior management staff with over 100 years of collective experience oversee the financial, operational, legal and compliance structure of the firm.
That was Tremont; what did Fairfield Greenwich Group (FGG) promise?
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 ….
It is now obvious that Fairfield Greenwich did none of these things while dealing with Madoff. They couldn’t have examined his trading records, for instance, because he never supplied them. They never questioned his auditor, conducted detailed interviews with staff, etc., etc., etc. “But we trusted him!” seems to be their defense and the reply of defrauded clients will be, “but you shouldn’t have”.
European banks shrug off Madoff losses. They figure it’s their clients’ loss, not theirs. “Their reputation will suffer”, says one commentator, “but that’s all”. I don’t know anything about European security law but here in America, banks who suggested such garbage won’t be as lucky.
Foreign investors dump all U.S. long term assets. Who can blame them for no longer trusting our stock or bond market or the ability of the S.E.C. to ferret out fraud? It’s not helping the Dow Jones today, that’s for sure.
Prediction: 1/3 of hedge funds to disappear. I have a client whose fund is up over 10% for the year but they’ve still suffered a withdrawal of 20% of their assets they manage, due to fear and customers who need money to pay other liabilities. If that’s what’s happening at a profitable fund, I won’t be surprised if this prediction proves accurate.
Hispanic immigration has dropped by 1/2 –500,000 from 1,000,000 and for the first time in years, the number of them working has declined. I’ve never been opposed to allowing anyone who wants to work to enter the country but I side with Milton Friedman, who stated that open borders were incompatible with a welfare state. We’ve tried that combination without much success so perhaps we now have a chance to try something else.
We’re looking at a $10 million shortfall in this year’s budget and $31 million over the next 18 months. Thats about 10% of our $340 million budget and, I suspect, the shortfall will grow, not shrink (for instance, we’re about to lose every penny of state funding for education, about $3 million, which was just about the last bit of our tax money returned to us by Hartford – time to secede from the union?). First Selectman Tesei is proposing some band aids like banning overtime and reducing non-salaried positions but I don’t see how that’s going to do much good. Time to cut staff, cut capital expenditures and batten down the hatches. One bad idea: postponing the scheduled $2 million payment into the town’s pension fund. Like every town and state in the country Greenwich has bought labor peace now by promising ridiculously unaffordable pension payments later but we now have that obligation, and delaying forking over the dough merely postpones yet another element of the mess we’ve gotten into. Pay up, then address the matter going forward.
Still no word, by the way, on the Building Department restoring its public hours now that its staff has so much less to do. If Tesei is looking for a place to cut wasteful spending, I suggest he start here (but only between the hours of 1-2:30).
The New York Times takes pride in its numerous traitorous revelations of our nation’s attempt to combat terrorism but at least its sentiments and actions are fueled by a genuine hatred for George Bush. What was the Chicago Tribune’s excuse for blowing the U.S. Attorney’s investigation of Blagojevich? According to today’s Journal, the feds were about to capture, on tape, the first outright sale of a senate seat and could have nailed both seller and, more important, the buyer. The Tribune says journalistic integrity demanded that it publish – I think it’s more juvenile than that, and they just wanted to be first with the news, even at the expense of derailing an ongoing investigation. Or the paper knew the politician who was trying to buy the seat – the Journal makes it pretty clear that it was Jesse Jackson Jr. – and wanted to protect him. Take your pick.
People are beginning to question what, exactly, Greenwich’s Fairfield Greenwich Group did to justify earning as much as $135 million a year by merely shoveling money over to Bernie Madoff to steal. As this page (and its readers) have noted, there was zero due diligence conducted by Fairfield Greenwich, despite its fulsome praise of its abilities in that regard posted on its website. The defense Fairfield Greenwich is trying out, that this was a “highly-sophisticated fraud” that could have been, and was missed by everyone, won’t carry much water with clients who paid their investment firm to detect such fraud, particularly when it appears that there was nothing complex about this scam at all, just a repeated assertion to “trust me”. Even Reagan knew better than that: “trust, but verify”.
“It’s mind-boggling that people like Tremont and Fairfield Greenwich had been doing this for so long,” said Brad Alford, who runs Alpha Capital Management LLC in Atlanta, which helps clients choose hedge funds. “It’s the job of these funds of funds to be doing due diligence. That’s why they get paid.”
In Palm Beach, the Wall Street Journal reports, defrauded investors are already putting their $17.0 million condominiums up for sale and hawking their Ferraris, yachts, and jewelry. Will Fairfield Greenwich’s founder, Walter Noel, have to sell his own Round Hill mansion? If he does, you’ll read it here first.
Update: The Journal article mentions a real estate agent who spent her weekend showing those newly-listed condominiums to New Yorkers who flew down to prey on their friends’ misfortunes. That’s mean, of course, but I’m guilty of pulling the tax cards for the houses of several of the Greenwich players in this drama and forwarding them to some of my own clients, just to give them a heads up on what might be coming on the market. Reagan may have advised to “trust but verify”; I learned in the Boy Scouts, “be prepared.”