Uma Thurman No Help to Arpad Busson in Madoff Fraud’s Nightmare

Date: Thursday, January 8, 2009
Author: Stephanie Baker and Tom Cahill, Bloomberg

Arpad Busson is angry. He’s just looked at the latest returns of a hedge fund he used to invest in; it’s down more than 60 percent in the past nine months.

“That a-hole!” Busson says of the New York-based manager, as he walks out of the conference room at the Mayfair offices of EIM SA, the $11.5 billion fund-of-hedge-funds firm of which he is founder and chairman. Though EIM yanked its money out of the fund in April 2008, when it was down only 25 percent, Busson says there are too many like it out there.

“If these managers are not focused on preservation of capital, they should not have the right to manage other people’s money,” he says.

Busson’s opinion matters. Since he launched EIM in 1992, he has been instrumental in luring billions of dollars of public and corporate pension money into his and other funds of funds. The industry, which Busson helped pioneer, allows investors to spread their risk among hedge funds with different strategies.

The number of funds of funds has swelled to 2,500 from fewer than a hundred 20 years ago, and the amount of money they manage increased eightfold to $826 billion as of June 2008. The global financial crisis has sent that growth into reverse, and fund-of- fund firms are now closing along with the hedge funds they invest in.

Busson, 45, a French-born child of the European financial aristocracy, started his career as a high-priced matchmaker, pairing new-world hedge fund managers with old-world money. He parlayed that into a fund-of-funds business that’s paid off handsomely. EIM’s funds gained an annual average of 12 percent from 1996 to 2007, and his wealth was estimated before the crisis by London’s Sunday Times at 250 million pounds ($390 million).

High Social Profile

As Busson’s influence has grown, so has his social profile. Busson, known as Arki, was for years photographed on the arm of supermodel Elle Macpherson, with whom he has two children, and he’s now engaged to actress Uma Thurman. His annual ball for the charity he helped start, Absolute Return for Kids, or ARK, is a must- go event for London hedge fund moguls.

“Busson’s got a Rolodex that covers not just hedge funds and finance but also his contacts from his high profile in the media and philanthropy worlds,” says Ian Morley, founder of Wentworth Hall Consultancy, a London-based adviser to hedge funds and funds of funds. “He’s become a celebrity larger than the hedge fund industry.”

Busson is now struggling to contain his clients’ losses as the global stock, bond and commodities meltdown slams the hedge fund industry and the funds of funds that depend on it. More than 100 funds of funds shut down between June and October 2008, and many face a flood of redemptions from both individuals and institutional investors. EIM had its first losing year in 2008; Busson says EIM’s accounts lost 8-19 percent.

Madoff Victim

In mid-December, EIM disclosed it was one of at least a dozen funds of funds caught up in the massive alleged fraud perpetrated by New York investment manager Bernard Madoff. Busson says $230 million of client funds were invested with Bernard L. Madoff Investment Securities LLC, 2 percent of EIM’s assets. Madoff may have lost as much as $50 billion in what prosecutors say he himself described as a “giant Ponzi scheme,” in which he paid redemptions by existing investors with new investments.

“Catching a fraud is practically impossible,” Busson says. “There’s only so much due diligence you can do. This was not an obscure little manager in the boondocks. He seemed like a very experienced, knowledgeable, trustworthy man -- like the best con artists always are.” Madoff had been head of the trading committee at the Securities Industry and Financial Markets Association and was chairman of the Nasdaq Stock Market.

Due Diligence Questions

EIM’s exposure was through three outside hedge funds that EIM invests in, and that had accounts with Madoff, Busson says. No EIM account had more than 5 percent of its assets with the New York broker and money manager, he says, and one fund EIM invested in had its accounts audited by a major global accounting firm.

John Godden, CEO of London-based IGS Group, which advises hedge funds, says any fund of funds that gave money to Madoff didn’t probe deeply enough. “It really undoes any pretense that these people were doing proper due diligence,” Godden says, declining to comment specifically on EIM. “People are going to be questioning the processes that funds of funds were going through to assess investments.”

EIM is one of at least 16 fund-of-fund firms and private banks that had disclosed exposure to Madoff as of mid-December, including some of the oldest in the business, such as Rye, New York-based Tremont Group Holdings Inc., founded in 1985, and Switzerland’s Notz, Stucki & Cie., started in 1974.

Fees Upon Fees

The Madoff scandal has heightened investor skepticism of strategies in which they end up paying two sets of fees. Hedge funds typically take 2 percent of their assets as a management fee and 20 percent of profits, while most funds of funds charge an additional 1 percent of assets and 10 percent of profits. EIM, which creates customized accounts, charges 1 percent of assets and 5 percent of any gains, Busson says.

“There’s been a huge mismatch between what’s been promised by funds of funds and what’s been delivered,” says Kerrin Rosenberg, chief executive officer at Cardano UK, which advises pension plans and other institutions with about 50 billion pounds under management. “Many of these pension plans regard their investments with funds of funds as an experiment, and towards the end of 2009 they’re going to conclude it has failed, and they won’t invest in them again, ever.”

Busson predicts that the global plunge in stock and commodity prices and the world economic slowdown will kill as many as half of the world’s hedge funds, and he says the culling of weak funds is “very healthy.” The number of hedge funds, excluding funds of funds, peaked at 7,652 at the end of June 2008 and declined to 7,299 as of the end of October, according to Chicago-based Hedge Fund Research Inc.

Hedge Funds Outperform

Busson says there’s still a role for funds of funds like his, because institutional investors find the screening and monitoring of hedge funds too time-consuming and expensive to do themselves. He also notes that both EIM, and hedge funds generally, have performed better than the market.

EIM’s 12 percent average gain through 2007 compares with 8 percent for the Standard & Poor’s 500 Index and 8.6 percent for the Fund of Funds Composite Index published by HFR. In 2008, the S&P 500 fell 38 percent, while HFR’s Global Hedge Fund Index dropped 23 percent. Its Fund of Funds index dipped 19.49 percent through November, the last period for which data is available.

Busson is personal friends with some of Europe’s, and America’s, wealthiest investors. “He’s been a pioneer,” Wentworth’s Morley says. “With his combination of energy, focus and his contacts, he took managers from America and introduced them to European investors.”

Looking for Alpha

Busson sees his job as finding hedge fund managers who can produce alpha -- returns that beat the benchmarks for stock, bond and commodity performance. He leads a team of 205 analysts who scour the world for new talent and track the performance of 1,000 hedge fund managers.

They work from EIM’s headquarters in Nyon outside Geneva and the firm’s small London office, which is decorated with prints by Japanese-born photographer Hiroshi Sugimoto.

EIM -- originally European Investment Management -- creates tailor-made portfolios of hedge fund investments for clients based on their individual needs. If a client wants a fund with no emerging-market exposure or wants his portfolio locked up for one year instead of three years, Busson’s team will come up with a basket of hedge funds that meets that requirement. EIM currently runs 110 separate accounts that invest with 150 different hedge fund managers.

EIM Sheds Managers

Busson says EIM started pulling back from certain funds in February 2007, when credit markets began to wobble. EIM sold out its positions in 42 funds in 2007 and fired another 64 managers in 2008, while taking on 24 new managers. Busson says that in some cases the trigger was a shutdown in communication between fund managers and investors. “When there’s turmoil, transparency is king,” Busson says.

One hedge fund strategy Busson fled is convertible arbitrage, in which a fund buys convertible bonds, which can be converted into shares at a certain price, and then sells short the underlying stock to hedge the bet. Such funds suffered grievous damage from the bans and restrictions on the shorting of stocks imposed around the world in September and October. As of mid- December, less than 4 percent of EIM’s portfolios still had exposure to convertible arbs. “If I was such a genius, I would have cut everything out,” Busson says.

Macro

In 2008, Busson says EIM increased its exposure to macro trading strategies, in which funds bet on broad swings in the economy. EIM is also invested with commodity trading advisers such as David Harding’s London-based Winton Futures Fund, which was up 18 percent through November, and London-based BlueCrest Capital Management Ltd.’s BlueTrend, a roughly $8 billion futures trading fund that returned 38 percent for 2008 through November.

“There are managers making money,” Busson says. “Strong organizations with strong risk controls will survive and prosper.”

The Madoff loss is by far the biggest of several EIM missteps. Busson says EIM had $9 million of client money invested in the Bear Stearns hedge funds that went belly up in July 2007, touching off the meltdown in mortgage-backed securities. Another EIM holding that was a casualty of the crisis was Drake Capital Management LLC, a New York-based money manager started by BlackRock Inc. executives seven years ago. Drake is liquidating three of its funds.

EIM also put money into some of 2008’s best-performing hedge funds, including about $400 million in Paulson Advantage Plus, a Paulson & Co. fund that was up by 29 percent through October. Another winner was: Brevan Howard Macro Ltd., run by London-based Brevan Howard Asset Management LLP, which was up 19 percent through October.

Friend of Bill’s

Even as he maneuvers through the financial crisis, Busson continues to spin in London’s social whirl. The tabloid press portrays him as a wealthy playboy jetting between his townhouse in southwest London and his villa in the Bahamas. Busson counts Madonna, Hugh Grant and former U.S. President Bill Clinton as friends. He knows Clinton through their joint charity work.

Reflecting his near iconic status in the hedge fund world, Busson appeared as one of the gods floating in the clouds in “The Art of Hedge,” a sequence of drawings and silkscreens by London artist Adam Dant, which hung in a Mayfair gallery in 2007.

Busson reserves his rare explosions of anger for hedge fund managers who lose money, friends say. When entering buildings, he opens doors for others and gushes about the generosity of fellow hedge fund managers who give to charity.

“He’s charm personified,” says Nick Finegold, founder and executive chairman of Execution Ltd., a London-based investment bank that annually donates a day’s trading proceeds to charity, with a third going to ARK. “He has complete command of the words ‘please,’ ‘thank you’ and ‘well done.’”

Two Sons with Elle

Busson began dating supermodel Macpherson in the mid-1990s. The pair broke up in 2005 without marrying, and split custody of their two sons, one of whom counted the late Italian auto tycoon Giovanni Agnelli as godfather. In announcing their separation, they issued a joint statement saying, “We have had, and in many ways continue to have, a wonderful relationship, which has produced two beautiful children.”

Busson, who sports longish brown hair and beaded necklaces and bracelets, met Thurman, 38, star of the movies “Pulp Fiction” and “Kill Bill,” at a private dinner in Rome in 2007. The pair began a whirlwind romance, vacationing in St. Tropez and on a yacht off Sardinia. They have also attended high-profile events around the world, including recent fetes such as Nelson Mandela’s star-studded 90th-birthday party in London’s Hyde Park in June, singer Elton John’s 10th White Tie and Tiara benefit for AIDS at his British manor home in June and the 2007 Nobel Peace Prize Award ceremony in Oslo.

100,000 Pound Tables

They were the toast of ARK’s June 2008 dinner, held at the Royal Naval College in Greenwich and attended by 1,000 people, including leading hedge fund managers. Tables sold for 100,000 pounds, and ARK auctioned off a bit role in Thurman’s next movie, “Eloise in Paris,” to an anonymous bidder for 450,000 pounds. The film is based on a children’s book by Kay Thompson. In six years, ARK has raised and given away more than 100 million pounds.

Arki and Uma announced their engagement in June by throwing a lavish party at Busson’s London home for guests including Elton John and Sting, supermodel Claudia Schiffer and artist Damien Hirst.

Busson’s high standing among European investors can be traced partly to his family roots in the world of international finance. His step-grandfather Arpad Plesch was a Hungarian-born financier who married three times. Plesch earned his fortune from businesses around the world, including a large stake in the Haitian-American Corp., which owned sugar plantations.

The Rich Life

Plesch, a lawyer, was famous in the 1930s for suing governments that abandoned the gold standard written into the contracts for international bonds he owned. Busson says Plesch won cases in France and Germany, lost in the U.S. and failed in the U.K. when the House of Lords overturned a potentially lucrative court verdict in his favor.

“The Plesches knew everybody,” says Hugo Vickers, who edited “Horses and Husbands: The Memoirs of Etti Plesch” (Dovecote Press, 2007), the chronicles of Plesch’s third wife. “Arpad Plesch was part of a world of people who are so rich we don’t even hear about them.”

Plesch first married Leonina Ulam, Busson’s great- grandmother, and after she died, married her daughter, Marysia Ulam Harcourt-Smith, who already had a daughter from a previous marriage -- Busson’s mother Florence “Flockie” Harcourt-Smith, an English debutante. Flockie met Busson’s father, Pascal, in Paris in the 1960s. Pascal served in the French army before going into finance, where he opened up European offices for a Wall Street firm called Faulkner, Dawkins & Sullivan and then headed the French operations of Lehman Brothers.

Le Rosey Alum

Born in Paris, Busson was raised and educated mostly in Switzerland, attending Le Rosey, a boarding school located between Lausanne and Geneva. Known as the “school of kings,” Le Rosey counts among its alumni the late Shah of Iran, the late Prince Rainier III of Monaco and the Aga Khan IV, millionaire head of the Ismaili branch of Islam. In the winter months, the school body moves to a campus in the ski resort of Gstaad. Busson grew up skiing and toyed with the idea of becoming a professional downhill racer. Instead, after school he did a one-year stint in the French army, serving in the Alpine troops.

Busson’s career as a lord of financial middlemen began in the mid-1980s with a casual introduction to Paul Tudor Jones while the two were dining at Indochine, a popular French-Vietnamese restaurant in New York’s East Village. Tudor Jones’s Tudor Investment Corp. was the talk of the financial world at the time: it posted returns of 136 percent in 1985 and 99 percent in ’86. Busson began doing freelance marketing for Tudor Jones, now 54, tapping his circle of rich European friends from Le Rosey and beyond.

Black Monday Winner

Busson’s clients tripled their investment when Jones correctly predicted the stock market crash of Oct. 19, 1987. “In doing his research, Jones saw there was a 98 percent correlation between the S&P of the 1980s and the Dow of the 1930s,” says Busson, who was with Jones on Black Monday. “One thing is to have a vision and predict it and the other is to capture it.” Jones declined to comment for this article.

Busson says Jones introduced him to Louis Bacon at a dinner party in Aspen in 1986. Bacon had just founded hedge fund firm Moore Capital Management LLC. Busson soon began finding clients for Bacon, too. In 1990, Jones and Bacon both hit the jackpot and cemented their reputations when they bet that the Japanese stock market, which had risen 83 percent from 1988 to ’89, would tank. The Nikkei 225 Index nose-dived 38 percent in 1990, marking the end of Japan’s boom economy.

Chasing the Tiger

Bacon helped Busson land his next client: Julian Robertson, founder of Tiger Management LLC, which would grow into a giant in the hedge fund world. “Julian wanted to raise money offshore, and so he asked me to help at Louis’s suggestion,” Busson says. Robertson declined to comment.

Busson began marketing for Robertson at the end of 1990, just as Tiger took off, and continued through ’97. Busson says he got paid for bringing in client money, declining to give details. In ’91, Robertson had $1 billion under management. By ’98, it was $21 billion. Through August ’98, Tiger posted an average annual return of 32 percent. Robertson, 76, now runs a golf resort in New Zealand.

“Arki had a genius for finding geniuses and the tenacity to sell them like mad,” says Hugh Hendry, who manages about $500 million as founder of Eclectica Asset Management in London. He says he doesn’t know Busson personally and EIM is not an investor in Hendry’s hedge funds.

Long-Short Strategy

Hendry says Busson convinced conservative pension funds that it made sense to use hedge funds to deploy multiple strategies that could short the market as well as invest in securities for the long term. “He was able to dispel the fear and sell something completely unconventional,” Hendry says.

With a steady flow of wealthy clients hungry for high returns, in 1992 Busson decided to move from being an investment adviser to setting up a fund-of-funds firm.

The first funds of hedge funds were established in 1969 by Geneva-based La Compagnie Financière Edmond de Rothschild Group and by the Belgo-Dutch bank Fortis. Funds of funds became part of pension portfolios this decade, when state, local and corporate retirement funds seeking higher returns to meet their mounting unfunded liabilities started setting aside small amounts for hedge funds and private equity. They relied on funds of funds to monitor their hedge fund investments and smooth out returns.

Pension Plan

European Investment Management at first garnered clients through Busson’s wealthy friends and acquaintances. In 1995, he began broadening his base by opening offices in London and New York and soliciting business from institutions. After countless presentations at pension conferences, by 1997 EIM had about $1 billion under management.

A milestone came in 1999, when the California Public Employees’ Retirement System, the largest U.S. public pension plan, made its first allocation to hedge funds. Calpers managed $213.5 billion, $7.1 billion of it in hedge funds, as of the end of September.

From 2001 to ’03, the number of funds of funds more than doubled to 1,232 from 550 as institutional investors poured in money. EIM took advantage of the boom. By 2003, EIM’s assets had swelled to more than $4 billion. In 2004, EIM won its first account from a sovereign wealth fund, which Busson continues to service and declines to name.

Custom Hedges

Many institutional investors had started out putting money into funds of funds that offered the same mix of hedge funds to all investors. EIM won them over with its customized approach and Busson’s ability to pick managers who beat their benchmarks. EIM also lured in major pension funds because of Busson’s close links to once hard-to-access hedge funds such as Tudor Investment and Moore Capital.

EIM hit a rough patch in mid-2007 as some of the funds it invested in went bust on the back of the subprime meltdown. Still, as late as October 2008, EIM was winning new pension fund mandates that balanced out redemptions from other clients.

Then the alleged Madoff fraud hit. An investment with Madoff was a litmus test for whether a fund of funds did proper due diligence, says Salomon Konig, who invests about $75 million with funds of funds as chief investment officer at Aventura, Florida- based investment firm Artemis Capital Partners LLC. “Whenever a fund had money with Madoff, it raised a red flag,” Konig says. “It meant they were chasing returns.”

Madoff Fallout

Busson says he thought a colleague was joking when he called to tell him Madoff had been arrested. After all, Busson says, the accused felon was a broker-dealer who was subject to scrutiny by the U.S. Securities and Exchange Commission. “I knew the SEC was all over this shop,” Busson says. “The main reason we got comfort was that it was SEC-regulated.”

In the wake of 2008’s financial meltdown and the Madoff scandal, new clients will be harder to find -- for Busson and the rest of the fund-of-funds industry. The reputation of funds of funds has suffered along with that of the hedge funds themselves. At least 118 funds of funds closed in the four months from the end of June to the end of October, while the number of hedge funds fell by 693 in the first nine months of the year, a record pace. “There are just too many funds of funds,” says Cardano UK’s Rosenberg. “They’ve just got to consolidate.”

New York State’s $155 billion retirement system has shifted a portion of its $5.3 billion in hedge fund assets away from funds of funds and is investing them directly in hedge funds. ITT Corp.’s pension fund and Baylor University’s endowment have done the same.

EIM Will Survive

Pension consultants expect EIM to weather the shakeout. “They’re better positioned to survive than most,” says Phil Irvine, director of London-based PiRho Investment Consulting Ltd. “Given their size and institutional client base, they’re well placed.” PiRho advises pension plans, endowments and other institutions with $7 billion in hedge fund investments.

“In the end, if there’s no performance and no added value, then the business is kaput,” says Jacob Schmidt, founder of Schmidt Research Partners Ltd., a London-based hedge fund advisory firm.

As markets reel and the implications of the Madoff affair sink in, EIM and the rest of the fund-of-funds industry face new pressure to deliver that added value. For Arki Busson, the scion of financial aristocracy and the squire of stars, the next year will show whether he can get his firm back into the black and restore the luster to his glittery career.

To contact the reporter on this story: Stephanie Baker in London at stebaker@bloomberg.net. Tom Cahill in London at tcahill@bloomberg.net.