Institutional Investor's Alpha Magazine - July/August 2008 - (Page 8)

The Case for Plan B T Samuel Israel III, the Bayou Group mastermind convicted of fraud, cost investors dearly. he July 2 surrender of fugitive hedge fund manager Samuel Israel III served as a reminder of the treachery swindlers are capable of. Israel, who was sentenced in April to 20 years in prison for defrauding investors in his Bayou Group hedge funds of $450 million, had been on the lam since June 9 — the day he was supposed to begin serving his prison term — after feigning suicide. The case, in a way, is the perfect pitch for insurance policies for hedge fund investors — a Plan B when Plan A goes south. But such offerings have notable limits. First, fraud must be established; coverage doesn’t come into play on bad investment decisions. Second, such insurance is good only for whatever assets can actually be recovered. Take Hedge Shield, a product being marketed by New York insurance broker Integro in a joint venture with risk-assessment ﬁ rm Amber Partners of Bermuda. Hedge Shield promises to recover assets within 90 days of government seizure. The catch, of course, is that the government has to seize something. These policies do Employed Again s Bear Stearns Cos. crumpled in March and was absorbed almost overnight by JPMorgan Chase & Co., thousands of employees lost their jobs. But some notable Bear professionals landed squarely on their feet. Among them: Melissa Ko, head of the $1.3 billion Bear Stearns Emerging Markets Macro Fund, who had been planning a move well before the demise of the bank. Her preparations paid off: Most of the macro fund’s assets are intact and have moved with her to her new fund, $ 925 million New York–based Covepoint Capital Advisors. Ko, who invests mainly in the liquid end of the market (currencies and their derivatives), was the only one of six Bear Stearns hedge fund managers whose assets emerged largely intact. The $16 billion hedge fund ﬁrm Tudor Investment Corp. in Greenwich, Connecticut, picked up Gregory Hanley and Alan Mintz, Bear’s former coheads of distressed-debt trading. The duo will launch a new Tudor business focusing on credit-related strategies. A Joining them from Bear: Mitchell Sussman, Eric Friel and Howard Norowitz. In April, Residential Capital named Thomas Marano, the former head of mortgage- and asset-backed securities at Bear, to be its nonexecutive chairman. ResCap is a wholly owned subisidary of General Motors Acceptance Corp., General Motors Corp.’s ﬁnancing arm. (Cerberus Capital Management, the $28 billion New York–based hedge fund and private equity firm, owns 51 percent of GMAC.) Aaron Fink, a managing director in the asset-backed-securities group at Bear, signed on with $14.5 billion New York– based hedge fund ﬁrm Perry Capital. And Steven Gordon, head of commercialmortgage-backed securities at Bear, was hired by $4 billion New York–based MKP Capital Management to lead the hedge fund ﬁrm’s CMBS efforts. “There was a lot of really good talent at Bear,” says Gordon. “You either structured or placed a lot of the deals, you know a lot of the collateral that is out there.” — F.D. and Imogen Rose-Smith not offer the guarantee of being made whole; what they provide is the promise of fast-track recovery of whatever’s left. Government payouts in cases like that of Bayou Group can take years — the ﬁrm collapsed in 2005, and the government has managed to seize about $100 million in lost assets but has made no restitutions. Jason Edwards, marketing director for London-based Protean Investment Risks, which offers hedge fund insurance to investors, says billions of dollars have been lost to fraud in recent years. He adds that the U.S. prosecution of two former Bear Stearns Cos. hedge fund managers on charges of securities, mail and wire fraud after the collapse last summer of the two hedge funds they ran could create a bigger demand for insurance. “If the Bear Stearns case — two funds invested in subprime mortgages — is proven to include fraud,” he notes, “then investors’ contention that dealing with big-name managers is safer gets battered.” High-profile hedge fund blowups are what make executives at companies like Integro and Protean think investors will buy insurance. “We’re talking about sophisticated investors who, despite their own due diligence, get caught up in a fraudulent fund,” says Michael Klaschka, an Integro managing principal. But the value of such policies is debatable. “I’m not sure how much more they add,” says David Kettel, a former U.S. Attorney who is now a white-collar criminal defense lawyer at Los Angeles law ﬁrm Venable. He says investors might want to ﬁnd out if a hedge fund they’re considering has its own insurance against losses. “If the answer is no, then maybe they’d want to get their own.” Denise Valentine, a senior fund analyst at Bostonbased research ﬁrm Aite Group, says the idea of offering investors insurance on their investments sends the wrong message: “The industry’s really bad, so we’ll sell insurance instead of trying to ﬁ x it.” — Janice Fioravante 8 • INSTITUTIONAL INVESTOR’S ALPHA • JULY/AUGUST 2008 BRIAN SNYDER/REUTERS

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - July/August 2008

Institutional Investor's Alpha Magazine - July/August 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Mr. Big Goes Small The Good Guys: Adopt This School! Interview: Man's Great Hope Cover Story: The Gentleman Activist Strategies: The New Bankers Profile: Staying Alive Research Center: The Best of the East The Asian Sensations Alpha Bytes: Into the Light Unhedged: Commentary: Speculating on Washington

Institutional Investor's Alpha Magazine - July/August 2008

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