Boston Hedge Fund Shuttering After Madoff Bet

Date: Monday, January 12, 2009
Author: Thomson Reuters

Hedge-fund firm GMB Capital Management is shutting down a fund that lost more than $50 million on bad bets that included putting money with accused swindler Bernard Madoff, according to sources familiar with the matter.

The Boston-based GMB Low Volatility Fund LP, which had more than $100 million in assets, began liquidating late last year, the sources said.

GMB Capital is run by Massachusetts Institute of Technology professor Gabriel Bitran and his son Marco. The Low Volatility Fund once wooed investors with the promise that it would rely heavily on Mr. Bitran's complicated algorithms to deliver low volatility where prices almost never change. Instead, the father and son team appears to have done exactly the opposite, funneling a big chunk of money to Mr. Madoff, a financier accused last month of running a $50 billion Ponzi scheme, the sources said.

GMB Capital, which manages other portfolios in addition to the Low Volatility Fund, did not return a call seeking comment.

Nearly four weeks after Mr. Madoff's arrest, GMB Capital is the latest player in a scandal that has vaporized millionaires' fortunes, forced a handful of charities to shut down, and been linked with at least one suicide. It has also embarrassed some of the investment management industry's brightest stars, who trusted the silver-haired Mr. Madoff without receiving real details on how he actually made money.

The sources said the Bitrans funneled about 17% of Low Volatility Fund's more than $100 million in assets into a hedge fund of funds run by Tremont Group Holdings' Rye Investment unit. Rye, in turn, plowed virtually all of its assets into Mr. Madoff's funds and lost $3 billion, lawyers familiar with the matter have said.

The sources said the Bitrans knew Rye was placing the funds with Mr. Madoff.

This arrangement left many of the Bitrans' direct investors fuming because traditionally hedge funds do not rely on funds of funds as subadvisers to put their money with other managers.

Mr. Madoff's arrest was only the final straw for the already ailing Low Volatility Fund, which was down roughly 50% by the end of November, people familiar with the matter said. Last year, the average hedge fund lost about 19%, according to industry researchers.

For funds facing such extreme losses—and there were hundreds of them last year—the only solution is to shut down, industry experts said. Between market losses and redemptions, experts estimate that the hedge fund industry shrank by half last year, to about $1 trillion from more than $2.5 trillion early last year.

Even though the Bitrans' firm was small, it was garnering attention because many investors are looking for the next industry stars and because the large successful hedge funds are often closed to new investors.

Since hedge funds are reserved for wealthy and sophisticated investors, they are supposed to be able to sustain losses. The Bitrans boasted strong resumes with degrees from MIT and Harvard and work experience at Wellington Management. GMB Capital's tony address in one of Boston's most vaunted downtown office buildings added to the image that the father and son had all the tools to make their investors' fortunes grow.

The elder Bitran is a professor at MIT's Sloan School of Management.

By Svea Herbst-Bayliss