Institutional clients of hedge fund-of-funds manager Pacific Alternative Asset Management Co. LLC are taking a long, hard look at the firm after a legal setback in early October and news of an SEC investigation.
Although some have asked for their money back, the most common reaction by PAAMCO clients has been to put the firm on their watch lists. But several institutional investors are making first-time or add-on investments with PAAMCO.
PAAMCO is one of the industry's largest and most institutional hedge fund-of-funds manager, counting among its clients the $218.5 billion California Public Employees' Retirement System, the $41.3 billion Massachusetts Pension Reserves Investment Management Board, the $71.6 billion Ohio Public Employees Retirement System and the $24 billion Pennsylvania State Employees' Retirement System.
About 95% of the $9.7 billion PAAMCO manages on a discretionary basis in hedge funds of funds is for pension funds, endowments, foundations and sovereign wealth funds. PAAMCO also consults on a non-discretionary basis on an additional $7 billion.
Investors and consultants alike expressed admiration for the intellectual firepower of PAAMCO's investment managers and the risk-adjusted performance of its hedge fund-of-funds strategies.
But they said they are concerned about the Securities and Exchange Commission probe and the implications of the change in ownership of PAAMCO Founders Co. LLC, a group of founding members that owns a roughly 75% voting interest and 65% economic interest in the investment manager, Pacific Alternative Asset Management. Both PAAMCO and PAAMCO Founders are based in Irvine, Calif.
PAAMCO's problems stem from an Oct. 5 ruling by U.S. District Court Judge Richard J. Sullivan in New York. He said PAAMCO founders and Managing Directors Jane Buchan, James Berens, William Knight and Judith Posnikoff must abide by a verbal agreement they made in 2000 that gave hedge fund manager S. Donald Sussman a 40% stake in PAAMCO Founders in exchange for providing start-up money for PAAMCO. Mr. Sullivan also ordered PAAMCO to pay Mr. Sussman $18.8 million in interest.
PAAMCO Founders said in a statement that the start-up money Mr. Sussman provided was “a loan transaction“ that did not give Mr. Sussman influence or control over the investment management company and his 40% stake in PAAMCO Founders still will not give him a say in PAAMCO's investment decisions.
According to a statement from Mr. Sussman's attorney, Philip C. Korologos, a partner at Boies, Schiller & Flexner LLP, New York, his involvement with PAAMCO was “a personal and passive investment in a fledgling company. Donald has never played a role in the management and operations of the company.”
Mr. Sussman's PAAMCO backing was made through Franklin Realty Holdings LLC, rather than through Paloma Partners LLC, the hedge fund company he founded and for which he serves as chairman and CEO.
PAAMCO has until Nov. 4 to appeal the ruling. “We are reviewing all options open to us,” Ms. Buchan, CEO, said in an interview.