Fortitude Assets Slump by Half After Madoff-Linked Redemptions

Date: Wednesday, September 23, 2009
Author: Malcolm Scott, Bloomberg

Fortitude Capital, an Australian hedge fund run by a former Citigroup Inc. trader, has been unable to arrest a slump in assets after redemptions from some investors who lost money with Bernard Madoff helped cut its managed funds in half.

Assets in Fortitude’s flagship Absolute Return Trust, which has posted gains in all but three months since its inception in March 2005, have tumbled to around A$85 million ($74 million) from about A$180 million in October, founder and Managing Director John Corr said in an interview in Sydney yesterday. The Fortitude Equity Income Fund, which started last week, has raised A$5 million, about half its June capital target.

“It’s frustrating,” said Corr, 46. “We thought good returns would generate attention, and history shows that they are somewhat irrelevant, which makes you somewhat skeptical.”

Overseas investors who allocate money to a range of hedge funds have bailed out even after Fortitude had positive returns during last year’s record declines. About a quarter of the redemptions were related to cash pulled by firms who faced losses on investments with convicted fraudster Madoff, Corr said. Madoff ran the biggest Ponzi scheme in U.S. history.

Damien Hatfield, principal at hedge-fund marketing and research firm Hatfield Advisors, said Fortitude’s fund-raising troubles are not unique among Australian managers.

Fund-of-Funds

“The guys who have had fund-of-fund money have seen significant redemptions, and there are probably still pockets of unwind within the fund-of-fund area,” Hatfield said. “You’re caught between a rock and a hard place here in Australia. The big investors from offshore are prepared to go to Singapore and Hong Kong, but Australia is just one step too far, which is very disappointing.”

Fortitude’s market-neutral Absolute Return fund, which seeks steady profits by trading pricing gaps between securities, has also struggled to attract new inflows as investors seek to profit from the global stock market rally, Corr said.

The MSCI World Index has jumped 65 percent since its March low on optimism the worst of the global recession may be over.

“People are still allocating money to the long-only managers which is driving the market and making them look good; it’s a bit of a vicious cycle for us,” he said. “The worst thing that can happen for us is that we rally back to at or beyond previous highs and everyone goes ‘2007-08 was an aberration, you don’t really need to protect the downside, everything is fine again.’”

Generating Returns

Hedge funds globally lost an average 18 percent last year, the most since Chicago-based Hedge Fund Research Inc. began tracking the industry. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from speculation on whether asset prices will rise or fall.

Corr, who was previously director of proprietary trading at Citigroup Global Markets Australia, said he is talking with third parties about distribution. He wants to grow each fund to their A$500 million target.

“We were happy to try to generate returns,” Corr said. “We weren’t worried about who invested and how to find them. We thought people would find us, and that was naive.”

The Absolute Return Trust was voted “Australian Hedge Fund of the Year” last week by the local arm of the Alternative Investment Management Association, beating finalists BlackRock Asset Allocation Alpha Fund Class D and the Kohinoor Series Two Fund.

To contact the reporter on this story: Malcolm Scott in Sydney at Mscott23@bloomberg.net