Geneva Funds of Hedge Funds Outflows Outpace Global Redemptio

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Geneva Funds of Hedge Funds Outflows Outpace Global Redemptions
By Warren Giles


Sept. 8 (Bloomberg) -- Geneva funds of hedge funds have failed to repair the damage caused by market losses and Bernard Madoff as investors withdrew money four times faster than the global average in July.

Withdrawals climbed to $2 billion from $500 million in June, according to data compiled by Eurekahedge Pte., which collects data on hedge funds worldwide. Assets invested in Geneva-based funds of hedge funds have slumped 74 percent to $14.2 billion since the end of 2007.

Outflows, relative to the size of Geneva’s funds of funds industry, outpaced those worldwide as local banks struggled to restore investor confidence after Madoff-related losses of about $7 billion. While single manager hedge funds are making a comeback after their worst year on record in 2008, funds of funds are still losing clients.

“Geneva has to reinvent itself,” said Jacob Schmidt, chief executive officer of Schmidt Research Partners Ltd., a London-based hedge fund advisory firm. “The fall since 2007 is shocking.”

Funds of hedge funds, which Geneva’s banks helped pioneer in the 1960s, earn fees by picking a basket of hedge funds for clients.

While the strategy is designed to diversify risk and banks are responsible for vetting fund managers, at least six Geneva- based institutions reported Madoff-related losses. They include Union Bancaire Privee, Banco Santander SA’s Optimal Investment Services, Genevalor Benbassat & Cie., Hyposwiss private bank, Banque Benedict Hentsch & Cie., and Notz, Stucki & Cie.

‘Frauds and Lapses’

Redemptions from Geneva funds of funds equaled more than 14 percent of assets in July, according to Singapore-based Eurekahedge. Global outflows were $13.4 billion, or 3.1 percent of the $433.7 billion of assets under management. The outflows contrast with global inflows into single manager hedge funds of $2.1 billion in July, data compiled by Eurekahedge shows.

“The notable relative underperformance of funds of funds to hedge funds and recent frauds and lapses in due diligence procedures will trigger further redemptions out of multi- managers, as investors will invest directly into hedge funds,” Eurekahedge said in a June report, commenting on global trends.

Worldwide, funds of funds have seen assets drop 46 percent since the end of 2007, according to Eurekahedge. Assets in North American-based funds fell 31 percent and those in emerging markets declined 18 percent, less than one-quarter the pace of the Geneva’s outflows over the same period.

Individuals vs. Institutions

Customer redemptions were high in Geneva because the city specializes in funds that target wealthy individuals, some of whom are being forced to sell assets to repay loans, rather than the institutions that money managers in London and New York cater to, Schmidt said.

“This isn’t about institutions panicking, it’s about private clients,” he said. “There must also be some forced de- leveraging.”

Some Geneva banks, including UBP, Lombard Odier & Cie. and Banque Syz & Co. have started, or plan to open, new funds of funds as they try to rebuild trust in the investment model.

Geneva funds of funds returned 1.4 percent in July, compared with a 0.3 percent decline the previous month, Eurekahedge said. Last year, the city’s funds of funds fell 22.4 percent, compared with an average 19 percent drop in hedge funds worldwide.

The Eurekahedge Hedge Fund Index, tracking more than 2,000 funds, rose 2.2 percent in July, gaining for a fifth straight month and taking the year-to-date increase to 12 percent. It was the best year-to-July return on record, Eurekahedge said.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether asset prices will rise or fall.

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