Geneva Funds of Funds Slump as Banks Struggle to Nullify Madoff

Date: Thursday, July 23, 2009
Author: Warren Giles, Bloomberg

Geneva banks, which began investing client money in funds of hedge funds during the 1960s, are struggling to rebuild the business after market losses and Bernard Madoff’s Ponzi scheme cut assets by 72 percent.

The assets of funds of funds managed from Geneva slumped to $15 billion in May from $54.2 billion at the end of 2007, according to data compiled by Singapore-based Eurekahedge Pte. Almost 25 percent of the 227 funds operating in the city at the end of last year shut in the first five months of 2009 and only six opened, less than a fifth of the 2008 number.

“Outflows have surpassed the investments of even the boom years,” said Regina Anhorn, a researcher at the Centre for Alternative Investments and Risk Management in Winterthur, Switzerland. “The damage has been substantial.”

While investors demand greater transparency and faster access to their money, private banks are under pressure to increase their due diligence after Geneva-based institutions lost about $7 billion from investments with Madoff. Funds of funds in Geneva “won’t ever be the same,” said Anhorn, a former banking analyst at Lombard Odier & Cie. The funds typically account for as much as 25 percent of a private client’s portfolio.

The performance of funds of funds from Geneva fell 22.4 percent last year, compared with the average 19 percent drop of hedge funds, according to Eurekahedge and Chicago-based Hedge Fund Research Inc. Hedge funds are private, lightly regulated pools of capital whose managers can buy or sell any assets, bet on falling and rising asset prices, and participate in profits from money invested.

‘Hit by Madoff’

Customer redemptions were high in Geneva because the city specializes in funds that target wealthy individuals, rather than the institutions sought by money managers in London and New York, said Stephen Oxley, London-based managing director at Pacific Alternative Asset Management Co., which oversees $9 billion of institutional client assets, including investments for Calpers, the biggest U.S. public pension fund.

“It’s notable that a high proportion of Swiss-based funds of funds were hit by Madoff, whereas virtually all institutional funds of hedge funds did their due diligence and avoided it,” Oxley said.

While Madoff didn’t run a hedge fund, his Ponzi scheme has led some investors to question the reviews carried out by the so-called feeder funds that supplied clients, and firms that manage funds of funds. Madoff, 71, is serving a 150-year prison term in Butner, North Carolina, after pleading guilty in a $65 billion fraud.

Feeder Funds

“Geneva’s wealth managers sadly attracted feeder-fund salesmen like flies to a honey pot, who, it turns out, were themselves entrusting their due diligence to a third party,” said Patrick Fenal, chief executive officer of Unigestion Holding SA in Geneva, which manages 10.5 billion Swiss francs ($9.8 billion), about 33 percent of which is in funds of hedge funds for mostly institutional clients.

“Private clients are traumatized because not only did they lose money, but they haven’t yet got back the money that’s been blocked,” Fenal said.

The European practice of allowing monthly redemptions, as opposed to the quarterly payouts in the U.S. and U.K., spurred outflows in Geneva, said Philippe Manet, a senior analyst and portfolio manager at Peak Partners SA, a Geneva fund of funds investor with about $550 million of assets.

“The industry probably mis-sold investments in the first place to people who were led to expect monthly liquidity in any circumstances,” Manet said. “It will take some time before they will come back, which is why it’s so important to offer highly liquid products, which are a form of therapy even though the less liquid strategies may yield more.”

UBP to Santander

Madoff losses are putting pressure on Geneva’s funds of funds industry at the same time that investors shun firms that had exposure to the New York conman, Manet said.

Union Bancaire Privee, Banco Santander SA’s Optimal Investment Services, Genevalor Benbassat & Cie., Hyposwiss private bank, Banque Benedict Hentsch & Cie., and Notz, Stucki & Cie. reported losses linked to Madoff.

Investors in Swiss funds want greater transparency and liquidity, and lower fees, said Peter Hegglin, fund of fund researcher for Mercer Investment Consulting in Zurich.

As Geneva bids to restore its reputation, UBP, Lombard Odier and Banque Syz have started new funds of funds this year. Funds of hedge funds earn fees by picking a basket of hedge funds for clients.

New Funds

UBP, which is offering clients partial compensation for the $700 million losses suffered with Madoff, announced plans for a $500 million fund in May. Chairman Edgar de Picciotto and his son, Chief Executive Officer Guy de Picciotto, have their own money in the fund run by outside managers as the bank seeks to rebuild “trust,” according to Chief Investment Officer Christophe Bernard.

Lombard Odier, Geneva’s oldest private bank, plans to offer two new fund of funds strategies this month. Officials at the bank declined further comment.

While a survey published last month by London-based Barclays Plc showed that more than two-thirds of those people worldwide with 500,000 pounds ($819,000) to 30 million pounds consider market fluctuations too high to risk investing, the appetite for hedge funds won’t go away, said Jerome Lussan, managing director of hedge-fund consulting firm Laven Partners LLP in London.

“The funds of funds model won’t die as long as people want to invest in complex instruments,” said Lussan. He recommends investors sign “side letters” that specify when managers must inform them of strategy changes and promise not to impose limits on access to capital.

‘Nut to Crack’

HSBC Holdings Plc, which raised $115 million in June for a new distressed asset fund of funds, said subscriptions for its flagship $1.6 billion product now outweigh redemptions and 70 percent of that money is coming through Switzerland.

“The benefits of last year are that there’s a much better choice of high-quality funds and it’s easier to persuade clients to move out of cash,” said Tim Gascoigne, global head of portfolio management at HSBC in London, who oversees $4 billion in funds of hedge funds.

For Geneva’s private banks, new funds of funds may not be enough because of their tradition of catering to risk-averse wealthy clients, said Jacob Schmidt, chief executive officer of Schmidt Research Partners Ltd., a London-based hedge fund advisory firm.

“It’s going to be a tougher nut to crack,” Schmidt said. “I don’t think high net worth individuals or private clients are very interested.”

To contact the reporter on this story: Warren Giles in Geneva at wgiles@bloomberg.net