DE Shaw, one of the largest US hedge funds, plans to appoint independent administrators to provide third-party checks that its investments exist, in an effort to reassure investors panicked in the wake of the alleged $50bn Madoff fraud.

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Fund plans third-party checks
By James Mackintosh
Published: March 1 2009 23:34 | Last updated: March 1 2009 23:34
DE Shaw, one of the largest US hedge funds, plans to appoint independent administrators to provide third-party checks that its investments exist, in an effort to reassure investors panicked in the wake of the alleged $50bn Madoff fraud.

The move by DE Shaw comes amid a growing clamour from hedge fund investors for more use of independent administrators, already standard in Europe but rare among US funds.

Feb-26

Since Bernard Madoff was arrested and charged with fraud in New York in December, US hedge funds have been under unprecedented scrutiny from investors concerned about possible repeats of the problem. Earlier this year Millennium Management, the $11bn New York hedge fund, appointed London’s GlobeOp to act as an independent administrator, to reassure investors.

Since Mr Madoff was arrested several further high-profile alleged frauds have emerged, including accusations that Texan billionaire Sir Allen Stanford’s bank is involved in a fraud.

“Up until recently, valuation was the issue investors in alternatives were most focused on,” said Darcy Bradbury, a spokesman for DE Shaw, which appointed HSBC last year to provide independent checks of asset prices. “Now we’re going beyond that and looking at third-party administration arrangements where an administrator would also substantiate positions and cash balances.”

Shortly after Mr Madoff was arrested, Union Bancaire Privée, the second-biggest investor in hedge funds and a major loser from the alleged fraud, began warning some of the biggest US hedge funds to introduce independent administrators or see it pull out.

The funds without independent administrators which it threatened to pull out of include DE Shaw and Millennium, as well as ESL Investments, run by Eddie Lampert, chairman of department store group Sears Holdings; Renaissance Technologies, run by billionaire mathematician Jim Simons; Chicago’s Citadel, run by Ken Griffin; SAC Capital, run by billionaire art collector Steven Cohen; Cerberus, one of the oldest hedge funds; Dallas-based HBK Capital; and Caxton Associates, run by billionaire Bruce Kovner.

Mr Madoff’s alleged fraud was possible because he operated a brokerage, giving him custody of assets, something highly unusual in the hedge fund industry. But he also had no independent administrator to check valuations or assets.

Administrators and European hedge fund lobby groups argue that having the additional check of an independent administrator is one of the main reasons there is little or no hedge fund fraud in the region, although managers in Europe are also regulated.

Copyright The Financial Times Limited 2009