Fraud, Weak Performance Hampering Hedge Funds
Garmhausen, Steve, American Banker
Byline: Steve Garmhausen
Not long ago, clients of Hawthorne, the multifamily office unit of PNC Financial Services Group Inc., were demanding more hedge fund choices.
Thathas all changedsince Dec. 11, when the financier Bernard Madoff was charged with perpetrating a gigantic Ponzi scheme. Now Hawthorne clients donot want to hear about hedge funds, said Thom Melcher, the business' chief investment officer.
"The first question has been, 'Are you bringing me something that is a hedge fund and that has a lockup?'" Mr. Melcher said. "If the answer is yes, we can't even get to explaining the investment thesis and the potential return."
The specter of fraud is likely to stalk the hedge fund industry in 2009, experts agree. But that is just one concern for the industry, which is also facing investors exasperated by hedge funds' poor performance and their long "lockup" periods, in which investments cannot be withdrawn.
Tough new hedge fund oversight is also expected. A Senate bill introduced last week would bring the virtually unregulated investment pools under Securities and Exchange Commission jurisdiction. Hedge fund investors are eager to have more information on matters such as how their money is being invested and how dependent their returns are on leverage, said Lee Giovannetti, the chief executive of Consulting Services Group LLC, a Memphisfirm that advises institutional and individual investors.
"There is very little confidence across the board with the current regulation system," he said. "Our clients and most institutional investors we're talking to would welcome more transparency."
Concerns about hedge funds' shortcomings are rippling through the all-important institutional investor community, which had relied on them to mitigate investment risk.
"Institutional investors, whether endowments, foundations, or retirement plans, are really kind of at a crossroads now," Mr. Giovannetti said.
Endowments and foundations are particularly anxious about the lack of access to money they have invested in hedge funds. Hedge funds routinely require investors to keep their money with the fund for a lengthy period, and in recent months many have taken steps to delay redemptions further.
That is "very, very concerning" for endowments and foundations because they need cash to meet commitments they have made to other alternative investment managers, Mr. Giovannetti said.
Pension managers' worries, meanwhile, center on performance and disclosure issues, he said. They are particularly concerned with the problems dogging one of their favorite investment vehicles - funds that invest in multiple hedge funds. Many nonpension investors have been winding down their positions in the funds of funds, which has forced the vehicles' managers, in turn, to make redemptions in the only places they are available: the best-performing hedge funds.
Pension investors are concerned "that they have been thrown in there with investors that do not have the same characteristics and objectives," Mr. Giovannetti said. …