Swiss Bank UBP, After Big Hit, Takes U.S. Hedge Funds to Task-Demanding Independent Administrators

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By CASSELL BRYAN-LOW

Swiss bank Union Bancaire Privée, which faces hefty losses in the alleged Ponzi scheme run by money manager Bernard Madoff, is threatening to pull several billion dollars of investments from large U.S. hedge funds because they don't use a full-time independent administrator.


The effort by Union Bancaire Privée, or UBP, is notable because it is one of the world's largest investors in hedge funds, with about $124.5 billion of assets as of June. The Geneva-based bank has said it had about $700 million in Madoff-related investments through its funds-of-funds and client portfolios.

The list of managers UBP plans to withdraw money from includes some of the biggest names in the industry, such as James Simons's Renaissance Technologies LLC; David Shaw's D.E. Shaw & Co.; Steven Cohen's SAC Capital Advisors LLC, and Bruce Kovner's Caxton Associates LLC. At least one fund has appointed an independent administrator, while others are adding new protections that fall short of that, which isn't likely to satisfy UBP.

The Madoff case has rattled many investors, and an increasing number are pressing fund managers to appoint independent administrators to provide an extra level of security against fraud. Many investors and other industry specialists believe that independent administrators help guard against fraud by serving as a third party responsible for confirming that the hedge fund has the assets it says it does.

Administrators perform day-to-day duties associated with running a fund, such as handling money from new investors and calculating the value of the fund's assets. An administrator calculates the asset value based on data it receives directly from the fund's custodian, such as a bank, which physically holds the shares and other assets owned by the fund.

"It's not an absolute panacea for all forms of fraud, but it's a pretty good starting point," says Darren Fox, a lawyer at London-based Simmons & Simmons who advises major U.S. and European hedge funds. Mr. Madoff had neither an independent administrator nor custodian.

In Europe, which has a much younger hedge-fund industry than the U.S., it is standard practice for hedge-fund managers to use independent administrators. While some U.S. funds also use independent administrators, it is much less common, particularly among larger, long-established funds.

There are limits to the safeguard an independent administrator can provide. An administrator may not detect a fraud, for instance, if the custodian is in cahoots with the fund manager and sending the administrator fictional data. The administrators of the funds that invested with Mr. Madoff didn't detect the alleged fraud as they relied on statements from Mr. Madoff's brokerage business, which held the assets.

Jan Frogg, head of the alternative-asset-management group at UBP, said the vast majority of hedge funds that the bank invests with already use an independent administrator. But within days of Mr. Madoff's alleged scheme coming to light, it decided to require the practice of all of its managers. He said UBP currently is invested in less than a dozen funds that don't use an independent administrator, all of which are U.S.-based.

"You need these things done independently to limit as much as possible instances of fraud or other irregularities," Mr. Frogg said. Starting in mid-December, UBP began putting in requests to withdraw funds from firms that don't use independent administrators and has been contacting managers individually. "It is not an accusation they are dishonest; we are no longer prepared to take any risk," he said.

One manager UBP invests in has already made the change. New York-based Millennium Management LLC, the roughly $11.5 billion fund run by Israel Englander, appointed London-based GlobeOp Financial Services Ltd. as administrator, effective Jan. 1. Millennium already had been considering such a move, according to a person familiar with the matter, and GlobeOp already worked with the fund providing some price information. Industry insiders say they expect other hedge funds to follow suit.

Mr. Frogg said about half of the funds UBP has spoken to have indicated they might consider changes, though some have said they won't.

Among funds that aren't expected to appoint an independent administrator are D.E. Shaw and Caxton, both based in New York, according to people familiar with the matter. D.E. Shaw, which had about $33 billion of assets under management as of the beginning of December, has been working over the past year to hire independent agents to verify valuations on a quarterly basis. Caxton, which manages about $8 billion, is in the process of hiring a firm to do periodic valuation verifications, likely on a monthly basis.

Some large funds say that they have spent millions of dollars building up teams of hundreds of staffers to manage tasks such as administration and that independent firms aren't equipped to handle the complexity or volume of their trades. They add that there are other checks and balances that help guard against fraud, such as an independent auditor and custodian.

—Scott Patterson contributed to this article.
Write to Cassell Bryan-Low at cassell.bryan-low@wsj.com