Funds of funds take drastic steps to cope with Madoff

Funds of funds take drastic steps to cope with Madoff
Funds of hedge funds entangled in products managed by Bernard Madoff are slashing fees and writing off investments in a bid to keep investors and cope with the fallout from the alleged fraud by the New York trader.

Nicola Horlick, manager of fund of funds Bramdean Alternatives, has said in a stock exchange filing she has written off Bramdean's investments in Rye Select Broad Market XL Portfolio and Defender hedge funds, each feeders into Madoff's investment program. The New Yorker was arrested last month and charged with a fraud which he is alleged to have told authorities could run to $50bn (€36.8bn).
Bramdean had about 9.5% of its assets in the feeder funds, and wrote them down as part of its November valuation. This combined with performance from other funds left Bramdean down 9.9% for the month.
Separately another feeder fund into Madoff, Fairfield Sentry, wrote to its investors early this week saying it would not charge management or performance fees on any assets they hold in Sentry, according to a document seen by Financial News. Sentry was said to have $7.3bn invested with Bernard Madoff in November, investors said. However, it is now unclear how much of this was not actually there if the investments Madoff claims to have made for them turn out to have been a pyramid scheme.
Investors have initiated a class action in New York against Fairfield Greenwich, which managed Sentry, for "breaches of fiduciary duty, negligence and unjust enrichment", according to court documents. The Connecticut-based manager, which is considering legal action of its own against Madoff, could not be reached for comment before this article went to press.
Another US fund which invested money with Madoff has reportedly said it is too early to sue to recover $3.5bn it put with the 70-year old. Kingate Management invested the money via two hedge funds. Bloomberg reported the firm wrote to its investors saying "we lose nothing by waiting and we gain the ability to watch as facts unfold".
A Queen's Counsel in London said hedge fund managers caught out by the alleged fraud may be obliged by their fiduciary obligations to investors to pursue legal action to recover assets. "A lot of hedge fund managers will wake up to this because they are all under some form of duty to their investors, and they will have to consider whether that duty requires them to take recovery steps."
A hedge fund lawyer in the Cayman Islands said: "Watching all this is like presiding over the long-term funeral of the fund of funds industry. Madoff has been a huge boost to the litigation and insolvency practice and it exacerbates the problems the fund of funds industry has had since last year. It will probably lead to a permanent contraction of that industry."
He said service providers such as auditors of feeder funds into Madoff could be "sued up hill and down dale" this year for not having noticed the fraud, while there could also be "a number of innovative claims against regulators".
--write walker@efinancialnews.com