Fund of Funds Madoff

Funds of Hedge Funds After Bernie Madoff

Funds of hedge funds are trying to remake their image after Bernard Madoff's massive ponzi scheme. Investors have lost confidence in the fund of hedge funds industry from factors including poor returns, a deep recession and high profile scandals like Madoff's. Another factor that may be turning investors away is the common extra level of fess fund of hedge funds charge but many of these funds are changing their methods to attract investors.

Investors withdrew at least $150 billion from fund of funds in 2008 and 2009 leaving these funds with an up-hill battle to reclaim that lost capital. To get investors back without having to drastically cut fees, fund of hedge funds are now replacing employees, heightening risk monitoring or giving investors greater liquidity.

This overhaul is particularly noticeable in the funds that invested with Madoff. Managers are replacing the people who should have foreseen the scheme and bolstering the existing risk management team. In cases when the decision to invest with Madoff was debated in the firm, the person(s) most responsible are being isolated as the sole reason that the fund of funds invested with Madoff.

This strategy of remaking their image and boosting investor confidence may be working. According to S&P, the fund of funds industry is having its first net inflows in over a year.

While the additional fees are not as high as those on the underlying funds, they nevertheless represent an extra cost, and the very need for funds of funds is now being questioned as some institutions consider cutting out the middle man. "Pension funds' hedge fund databases are getting sufficiently large that you can replicate a fund of funds by buying 50-to-60 funds," said Nick Bullman, managing partner at Bullman Investment Management.
Some firms have responded by developing a range of so-called managed accounts -- tailored and segregated portfolios for individual clients -- which allows them to sell when they want and which are hard for investors to reproduce.

London-based Permal, which runs around $19 billion in fund of funds assets, has expanded its range of managed accounts, including some tailored mandates, between which it can move money more quickly.

"Specialist groups and customized products could do quite well. If you focus solely on a customized or country specific product you can justify excess margins," said Bullman. "The idea of acting as a gatekeeper to ... funds doesn't work now." Source

Learn more about the Bernard Madoff Scandal and Hedge Funds here.

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