Funds of Hedge Funds Get $85 Billion in Withdrawals Post-Madoff

Date: Wednesday, April 22, 2009
Author: Saijel Kishan and Tom Cahill, Bloomberg.com

Investors pulled a record $85 billion from firms that invest in hedge funds in the first quarter after the disclosure of Bernard Madoff’s $65 billion fraud, according to data compiled by Hedge Fund Research Inc.

The pace of withdrawals from those funds of hedge funds quickened from the prior record of $50 billion in the last three months of 2008, the Chicago-based research firm said. Assets in the funds dropped to $525.6 billion, the least since 2006. Investors pulled $103 billion from hedge funds overall from January through March.

Funds of hedge funds including those run by Union Bancaire Privee, Banco Santander SA and Man Group Plc are among dozens that invested with Madoff. While Madoff didn’t run a hedge fund, the disclosure of his Ponzi scheme in December raised questions from investors about the quality of the reviews that funds of funds performed on investments.

“There were a number of fund of funds that had exposure to Madoff,” said Kenneth Heinz, president of Hedge Fund Research, said in an interview in London today. “The scrutiny has been on fund of funds and that’s had a big impact on what we’re seeing today” in investors withdrawing assets.

The number of closing funds of hedge funds outpaced the shutdowns of hedge funds for the first time in the 19 years HFR has been tracking industry data. There were 223 fund-of-fund closures and 201 hedge-fund liquidations.

At the end of March, 2,216 funds of hedge funds were in business, compared with 6,644 hedge funds, according to preliminary data from HFR.

‘Cancer’

Funds of hedge funds aim to minimize risk an investor would have from investing with a single manager. They also provide monitoring and manager selection. The investment pools have been criticized by investors including David Swensen, head of Yale University’s endowment in New Haven, Connecticut, who called them “a cancer on the institutional-investor world,” in a Jan. 13 interview with the Wall Street Journal.

Hedge-fund industry assets fell to $1.33 trillion at the end of the quarter as redemptions more than offset an average investment gain of 0.53 percent, the research firm said. Hedge- fund assets peaked at $1.93 trillion in June.

Hedge-fund withdrawals were an all-time high of $152 billion in the fourth quarter as average returns fell 19 percent for the year.

Madoff was arrested in December and pleaded guilty on March 12 to defrauding investors by using money from new ones to pay off old ones. Before the fraud came to light, Madoff told investors they had $65 billion in his firm’s accounts, prosecutors said. Madoff, 70, is in custody awaiting sentencing in June. He faces as many as 150 years in prison.

To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net; Tom Cahill in London at tcahill@bloomberg.net