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Massachusetts Pension Fires Austin, Ivy Hedge Funds

Date: Wednesday, February 4, 2009
Author: Sree Vidya Bhaktavatsalam, Bloomberg.com

The Massachusetts Pension Reserves Investment Management Board, which oversees $38 billion, voted to fire hedge-fund firm Austin Capital Management after losing $12 million with alleged Ponzi scheme operator Bernard Madoff.

The state pension board also decided at a meeting in Boston today to dismiss Ivy Asset Management, the hedge-fund unit of Bank of New York Mellon Corp., because several senior managers have left the firm. About $430 million in pension assets were invested with Ivy and $130 million with Austin, the board said.

Austin invested pension assets with Tremont Partners, the hedge-fund unit of Massachusetts Mutual Life Insurance Co. Tremont placed money through its Rye Select Broad Market Prime Fund LP with Madoff, the New York financier accused of fraud in a scheme that may have cost clients $50 billion.

“We have learned from this,” State Treasurer Timothy Cahill said at the meeting. The pension fund has examined all of its hedge-fund portfolios and “found that there are no other Bernie Madoffs in the funds,” Cahill said.

Massachusetts’ state pension has about $4.2 billion in assets in absolute-return strategies and portable-alpha investments, which try to beat market benchmarks by investing in hedge funds.

The pension fund’s hedge-fund holdings dropped 19 percent in 2008, while the average fund of hedge funds fell 20 percent last year, according to Chicago-based Hedge Fund Research Inc.

Supervision Questioned

Members of the pension’s investment staff told the board in a report today that Austin, based in Austin, Texas, didn’t adequately monitor its investments. While Austin executives had said they would visit investment managers once a year, they hadn’t gone to Madoff since 2005, the report said. Austin is owned by the asset-management division of KeyCorp.

Tremont had $3.3 billion invested with Madoff, a person familiar with the matter said in December. Of that, the firm’s Rye Investment Management unit had $3.1 billion, virtually all the money it managed, with Madoff.

Ivy Asset, based in Jericho, New York, manages about $7.5 billion in assets. The Massachusetts pension plan terminated the contract with Ivy after the hedge-fund manager cut 30 percent of its 165-member staff and key executives departed. Co-President Michael Singer and Stuart Davies, the head of investments, left last month.

Ivy Asset’s portfolio declined 20.03 percent last year, 8 basis points less than its benchmark hedge-fund index, according to the pension board report. During the past three years, Ivy Asset declined 0.97 percent annually, trailing the index by 11 basis points, the report said. A basis point is one-100th of a percentage point.

“Due to continued organizational changes, combined with poor investment performance, staff no longer has confidence in Ivy,” the report said.

Mike Dunn, a spokesman for New York-based BNY Mellon, declined to comment. Laura Mimura, a spokeswoman for Cleveland- based KeyCorp also declined to comment, citing client privacy policies.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.