Tremont Invested More Than Half Its Assets With Bernard Madoff

posted on:
December 16, 2008

author:
Katherine Burton

category:
Fraud

Dec. 16 (Bloomberg) — Tremont Group Holdings Inc., a hedge- fund firm owned by OppenheimerFunds Inc., had $3.3 billion, or more than half its total assets, invested with Bernard Madoff, according to a person familiar with the matter.

Tremont’s Rye Investment Management unit had $3.1 billion, virtually all the money the group managed, allocated to Madoff, said the person, who declined to be identified because the information is private. Tremont had another $200 million, or about 7 percent of its total assets, invested through its fund of funds group, Tremont Capital Management.

Tremont, which manages a total of $5.8 billion, would have made roughly $62 million this year peddling funds that are solely run by Madoff, who was arrested Dec. 11 after he allegedly confessed to running a “giant Ponzi scheme” that may have bilked investors out of $50 billion. Hedge funds that invested with the 70-year-old Queens, New York-native charged fees to their clients for the task of vetting the fund.

“We believe Tremont exercised appropriate due diligence in connection with the Madoff investments,” the firm said today in a statement. Tremont parent OppenheimerFunds is a unit of Springfield, Massachusetts-based Massachusetts Mutual Life Insurance Co.

Other funds that invested big with Madoff include Walter Noel’s Fairfield Greenwich Group, which had about $7.5 billion out of its $14.1 billion in total assets invested with the manager.

All together funds of funds had at least $20.3 billion invested with Madoff, who charged no fees to investors, getting paid instead through commissions from his brokerage business for trading the stocks in the accounts.

Fund Fees

Hedge funds that have disclosed holdings with Madoff were due at least $352 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.

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.

Investor Defections

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.

Due Diligence

Funds of funds say they earn their fees by discovering the best managers and assembling a diversified group of investments. They also are supposed to conduct ongoing due diligence to avoid frauds or other dangers, such as managers straying from their core investment strategy.

“I looked at investing in Madoff many years ago but there was just no transparency,” said Mohammed Syed, founder of London- based Axiom Fund Manager, which invests in funds on behalf of clients. “There wasn’t any transparency to link the story behind the returns to actual transactions.”

Tremont, founded by Sandra Manzke in 1985, sold Madoff- managed investments since 1997 under the Rye Select Broad Market name, charging 2 percent of assets, according to a marketing document.

Manzke now runs Darien, Connecticut-based MAXAM Capital Management LLC, which marketed a $280 million fund that was invested solely with Madoff. Manzke told the Wall Street Journal she was wiped out. Manzke didn’t return calls or e-mails.

SOURCE: Bloomberg.com

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