Bernard Madoff’s epic swindle destroyed more than just his clients’ fortunes—it felled much of the North American
hedge fund industry. Of the 200 or so
hedge fund families that began liquidation in 2008, 20% of them—managing a total $16 billion in assets—were Madoff feeder funds, according to a newly released study from HedgeFund Intelligence.
Failed hedge funds in 2008 destroyed about $84 billion of wealth, the study reports. By contrast, only about 50 hedge funds closed in 2007, amounting to $18.7 billion in assets—a mere fraction of last year’s vanishing.
Put another way, three of the 10 largest hedge funds to disappear last year were directly invested with Mr. Madoff’s firm: Fairfield Greenwich Group’s Fairfield Sentry Fund, money manager Ezra Merkin’s Gabriel Capital and Ascot Partners funds, and Tremont Group’s Rye family of funds.
Both houses of Congress have proposed legislation to require more transparency in hedge funds, and even go so far as to limit their investment activities, after many investors in the above funds reported they had no idea their money managers were simply funneling their cash to Mr. Madoff’s company to “manage.”
More hedge funds likely would have gone under except for the fact that many funds suspended redemptions last year, locking their investors in. At least 80 fund managers restricted withdrawals from their funds during the last two months of the year, according to data compiled by Bloomberg.
Major hedge funds that froze withdrawals last year include the $36 billion fund family at D.E. Shaw & Co., whose managing directors included Larry Summers until he joined the Obama administration in January as head of the national economic council.
Citigroup’s Old Lane Partners, a $4.5 billion
hedge fund group that was managed by Vikram Pandit before he became chief executive of
Citigroup Inc., froze withdrawals last spring, just a year after Mr. Pandit orchestrated the fund groups’ sale to Citi.
Overseas hedge funds fared no better. Worldwide, about 1,400 hedge funds liquidated last year, according to Hedge Fund Research Inc., crushing the 2005 record of about 850 fund closures. And it’s no wonder:
hedge fund losses last year averaged about 19%, the worst record for the industry since companies began measuring in 1990.
Just like Madoff's implosion took down funds-of-funds, the international casualties mounted as funds-of-funds got tripped up by their failing investments. About 275 of the 1,400 funds that closed last year were funds-of-funds, reports Hedge Fund Research.
On the flipside, about 660 new hedge funds burst onto the scene last year. The number is a far cry from the 2,073 funds launched in 2005, but still shows at least some investors are feeling optimistic enough about investment opportunities.
Familiar names also inched their way back into the scene last year, such as Nicholas Maounis, former manager of Amaranth Advisors, which famously flamed out in 2006 over massive losses in natural gas futures. At the time, the $9 billion fund’s collapse was the largest in history.
