Northwater Capital Management has warned that the performance of two of its hedge funds of funds may be negatively affected by an investment in an allegedly fraudulent company by a hedge fund used in Northwater’s underlying portfolios.
The FBI last week launched a fraud investigation into Minnetonka, Minn.-based Petters Group Worldwide and its founder, Thomas Petters, according to a source with knowledge of the situation who asked for anonymity.
The investigation centers on an allegedly fictitious electronics distribution network that the Petters Group used as collateral for loans it had from hedge funds.
Charges have not been filed against Mr. Petters or other employees of Petters Group Worldwide, according to a search of federal court filings. The FBI is continuing to investigate the fraud charges, confirmed D.K. Wilson, a spokesman for the FBI’s Minneapolis office,
In a statement Tuesday, Northwater, an institutional hedge fund-of-funds manager, said two of its three Toronto Stock Exchange-listed hedge funds of funds were affected. As of Aug. 31, exposure to the unnamed hedge fund totaled 4.3% of the assets of the Northwater Market-Neutral Trust and 2.5% for the Northwater Five-Year Market-Neutral Trust. As of June 30, assets in the Northwater Market-Neutral Trust totaled C$45 million (US$43 million), while the Northwater Five-Year Market-Neutral Trust had C$62 million, according to each fund’s second-quarter report.
Northwater officials said in the statement that they will write down the value of affected investments to zero when determining the Sept. 30 net assets of the two funds.
Stephen M. Foote, Northwater vice president, was unavailable for comment.
