and now the bandwagoneers, even manipulative shorting defenders, want to close the barn door after the livestock has vanished
Crackdown on hedge funds after Madoff affair
By Deborah Brewster and Joanna Chung in New York
Published: December 29 2008 19:46 | Last updated: December 29 2008 19:46
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Hedge funds are bracing themselves for a raft of more stringent requirements by investors and increasing regulatory scrutiny, following the revelations this month that up to $50bn has been lost through alleged fraud by Bernard Madoff.
Half a dozen lawsuits have been filed by Madoff investors, mainly focusing on the failure of due diligence by the middlemen, such as hedge fund of funds, which channelled money to Madoff.
Paul Kanjorski, a top Democratic Congressman, on Monday said a hearing would be held next Monday to examine the alleged fraud and how it went undetected for so long.
The affair is likely to lead to a crackdown on due diligence by fund of funds – which hold more than 40 per cent of hedge fund money – according to hedge fund marketers and advisers.
Switzerland’s Union Bancaire Privée, the second-biggest fund of funds, last week said it would require funds in which it invests to use independent administrators.
One hedge fund adviser, who looked into investing with Madoff and declined, said: “This is just the start. Third party administrators, greater transparency in investments, more regulatory oversight – we can expect them all.”
Mr Madoff did not use a third party administrator – an independent company that values fund assets and creates investor statements. Many in the industry consider a requirement for an independent administrator to be best practice, but it is not widespread.
The scandal also highlights a gap in regulatory supervision and is likely to fuel fresh calls for oversight of hedge funds.
There is no legal definition of a hedge fund, but in 2005 the Securities and Exchange Commission – which investigated Mr Madoff’s business – unsuccessfully attempted to require individuals managing more than $25m to register with the body.
Mr Madoff was registered as an investment adviser in 2006, but many who channelled money to him were not. The scrutiny comes with hedge funds fighting a tide of redemptions. In a cascade effect, fund of funds will need to redeem money from funds that perform well to cover funds that lost.
“It’s all the charities and pension funds who lost money that will trigger agitation over the regulations,” said the adviser.
Foundations that lost money with Mr Madoff gave away $73m to non-profit organisations in 2007, according to a Bloomberg tally of tax returns. These included charities including Amnesty International and the New York Public Theatre company.
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