Hedge Funds Brace For Madoff Fallout

Dec 15 2008 | 1:09am ET

Suffice it to say, the Bernard Madoff scandal was just about the last thing hedge funds needed in a year that was already set to go down as one of the industry’s worst.

But in a year in which the average hedge fund has lost double-digits amidst the economic instability, investor confidence is likely to be further undermined by Madoff, who was charged last week with running a $50 billion Ponzi scheme, to say nothing of the potential for billions in further losses.

Hedge funds made up roughly half of the client list of Bernard L. Madoff Investment Securities, including some prominent industry names, including Fairfield Greenwich Group, Bramdean Alternatives, Pioneer Alternative Investments and Tremont Capital Management.

“Anyone on the fence regarding redemptions to the fund industry over the next several months will likely put in their requests for capital withdrawal, as confidence in the system and in investment managers has been irreparably impaired,” Douglas Kass of hedge fund Seabreeze Partners Management told Reuters. Some estimates have hedge funds losing some 25% of their assets to withdrawals at the end of the month.

Some hedge funds, already battered by big losses, may not survive the association with Madoff at all.

“Is this going to be the nail in the coffin for a few hedge funds already teetering on the edge? I absolutely think so,” Peter Tureck of risk consultancy Kroll Inc. told Reuters.

Some of the hedge fund burned by Madoff are placing the blame squarely in the lap of someone else, namely, U.S. regulators.

“It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith,” Nicola Horlick of London’s Bramdean told The Telegraph. “The allegations appear to point to a systemic failure of the regulatory and securities markets regimes in the U.S.”

Those fighting words are certainly a change of tune for the hedge fund manager dubbed “Superwoman” by London’s tabloids. She once told the Financial Times of Madoff, “This guy has managed to return 1% to 1.2% per month, year after year after year.”

Bramdean had 9.5% of its assets invested with Madoff, totaling some £21 million (US$31.3 million).

Other alternative investment firms were not so lucky: Substantially all of Fairfield Greenwich’s $7.3 billion Fairfield Sentry Fund were invested with Madoff, as were those of Pioneer’s $280 million Primeo Select Fund, alternative investmet shops Access International Advisors, Fix Asset Management, Kingate Management, Banco Santander’s Optimal Investment Services and Maxam Capital Management are among Madoff’s client list. Ascot Partners, the hedge fund founded by GMAC Financial Services Chairman Ezra Merkin and managed by Madoff, is also thought to have lost all $1.8 billion in the Ponzi scheme. Some reports have Fred Wilpon, the owner of baseball’s New York Mets and founder of hedge fund Sterling Stamos Capital Management, losing some $500 million.

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