The $7.3 billion Fairfield Sentry Fund invested solely with Madoff, taking a cut of 1 percent of assets and 20 percent of gains, which averaged about 11 percent annually in the past 15 years, according to data compiled by Bloomberg. Fairfield Greenwich is one of at least 15 hedge-fund firms and private banks, including Tremont Holdings Group Inc. and Banco Santander SA, that earned similar fees for sending customers’ cash to the 70-year-old money manager. “It’s mind-boggling that people like Tremont and Fairfield Greenwich had been doing this for so long,” said Brad Alford, who runs Alpha Capital Management LLC in Atlanta, which helps clients choose hedge funds. “It’s the job of these funds of funds to be doing due diligence. That’s why they get paid.” Madoff was arrested Dec. 11 after he allegedly confessed to running a “giant Ponzi scheme” that may have bilked investors of $50 billion. That fraud escaped the notice of Fairfield Greenwich, Tremont and other funds of funds that had at least $17 billion invested with Madoff. Hedge-fund investment adviser Aksia LLC said the managers should have seen “red flags,” such as Madoff’s use of a little-known, three-person auditing firm. Hedge funds that have disclosed holdings with Madoff were due at least $290 million in fees this year, based on reported assets, fees and Bloomberg data. The calculations don’t include fees of as much as 5 percent that clients paid for some funds when they first invested. Madoff didn’t assess fees for his money-management services, getting paid instead through commissions from his brokerage business for trading the stocks in the accounts. Investors ensnared by Madoff include Fred Wilpon, the owner of the New York Mets baseball team, clients of private bankers in Geneva, wealthy Jewish families in New York and Palm Beach, Florida, and institutions including BNP Paribas SA in Paris that loaned investors money to increase their bets. Losses have been reported by a pension fund in Fairfield, Connecticut, New York hospitals and a charity in Salem, Massachusetts.
While Madoff didn’t run a hedge fund, his alleged crime may accelerate investor defections from the $1.5 trillion industry, already hit by its worst losses since at least 1990 and redemptions that may reach $400 billion this year, according to estimates by Morgan Stanley. In a Ponzi scheme, returns to early investors are paid with money from later ones, until there isn’t enough cash to go around. Madoff’s alleged scam unraveled when he received $7 billion in redemption requests that he couldn’t meet. Funds of hedge funds such as Fairfield Greenwich act as middlemen, raising money from investors and farming it out to other managers that they vet. The go-betweens manage 44 percent of hedge-fund assets, according to data compiled by Hedge Fund Research Inc. Their investments lost 19 percent on average through November, a little more than a percentage point more than single-manager funds, the Chicago-based firm says. Institutions including New York State’s $154 billion retirement system and the endowment of Baylor University have been cutting back their investments in funds of funds to save the extra layer of fees -- generally 1 percent of assets and 10 percent of profits -- that they charge on top of the underlying managers’ take. Last year, for the first time, more than half of the hedge-fund assets of the 200 largest U.S. pension plans were invested directly with individual managers, according to data compiled by Pensions & Investments magazine.
While Madoff didn’t run a hedge fund, his alleged crime may accelerate investor defections from the $1.5 trillion industry, already hit by its worst losses since at least 1990 and redemptions that may reach $400 billion this year, according to estimates by Morgan Stanley. In a Ponzi scheme, returns to early investors are paid with money from later ones, until there isn’t enough cash to go around. Madoff’s alleged scam unraveled when he received $7 billion in redemption requests that he couldn’t meet. Funds of hedge funds such as Fairfield Greenwich act as middlemen, raising money from investors and farming it out to other managers that they vet. The go-betweens manage 44 percent of hedge-fund assets, according to data compiled by Hedge Fund Research Inc. Their investments lost 19 percent on average through November, a little more than a percentage point more than single-manager funds, the Chicago-based firm says. Institutions including New York State’s $154 billion retirement system and the endowment of Baylor University have been cutting back their investments in funds of funds to save the extra layer of fees -- generally 1 percent of assets and 10 percent of profits -- that they charge on top of the underlying managers’ take. Last year, for the first time, more than half of the hedge-fund assets of the 200 largest U.S. pension plans were invested directly with individual managers, according to data compiled by Pensions & Investments magazine.
