Bernie Madoff stood little chance of luring U.S institutions into his alleged $50 billion Ponzi scheme because elite U.S. hedge fund-of-funds managers stood solidly in the way.
The due diligence of hedge funds of funds that specialize in managing mandates for U.S. pension funds, endowments and foundations found too many inconsistencies in the trading strategy managed by Bernard L. Madoff Investment Securities LLC, New York. However, a few smaller hedge funds of funds were invested in so-called feeder funds, single-manager funds managed by Mr. Madoff's firm.
“The fact that so many institutional investors' hedge fund-of-funds managers insisted on transparency and therefore avoided Bernie's is a testament to the quality of their due diligence. They protected institutional investors from getting involved in this fraud,” said Eric Weber, chief operating officer and principal of Freeman & Co., New York, a boutique investment bank.
Among those steering clear were the largest hedge fund-of-funds managers of U.S. institutional assets, including Pacific Alternative Asset Management Co., K2 Advisors LLC, Mesirow Advanced Strategies Inc., Goldman Sachs Asset Management, Morgan Stanley, JPMorgan Asset Management, UBS Global Asset Management, BlackRock Inc., Harris Alternatives LLC and the asset management unit of BNY Mellon Bank.
Grosvenor Capital Management LLC redeemed its small investment with Mr. Madoff in 1991. Arden Asset Management Inc. got rid of Madoff investments in 2002. The U.S. institutional clients of EIM Management (USA) Inc. were not invested in funds with Madoff exposure, though the firm did have $230 million invested in Madoff Investment Securities for non-U.S. clients.
“There were a thousand red flags, if you did the work. It didn't take much energy to reverse-engineer Madoff's track record and find that his split-strike conversion method just would not have worked in certain markets the way he said it did,” said the chief executive of a large institutional hedge fund-of-funds firm who asked not to be identified.