Fund-of-Hedge Funds Lacked Technology to Avoid Madoff Losses

Expert contends FOHFs didn't conduct due diligence, but a system would have helped to raise red flags.

Fund-of-hedge fund managers (FOHFs) that lost big in the alleged Madoff $50 billion securities fraud could have avoided the debacle if they had deployed technology to gather information and monitor the trading strategies and results from hedge funds they were invested in.

Rich Koppel

“Lack of technology is a factor, or failure to use technology effectively is a factor,” said Rich Koppel, founder and managing director of technology provider youDevise Limited in an interview yesterday. Koppel maintains that using technology would have enabled FOHFs to avoid the huge losses that resulted from investments in Madoff funds.

“I think the failure of the funds of funds that invested in Madoff was that they simply didn’t do the due diligence that they ought to have done,” said Kopell, who helped develop a portfolio management system called Hedge Fund Information Provider (HIP), one of the first online platforms for fund-of-hedge funds or FOHFs. The system, launched in 2006, is used by fund-of-hedge fund managers as well as fund administrators in Europe and North America to research and evaluate the funds they are investing in on a full-time basis. In addition, fund administrators, like Northern Trust, use the system to perform their analysis to generate reports for investors.

Whether or not fund-of-hedge funds performed due diligence has become a hot topic in the Madoff case since FOHFs such as Fairfield Greenwich Advisors, Tremont Capital Management, and Banco Santander, S.A., acted as “feeder funds” pumping assets into the Madoff black box trading strategy, without knowing much about his operations. Many investors including wealthy individuals, endowment funds and charitable organizations hired FOHFs to research the hedge funds, allocate their assets, manage the risk of their exposures and track the returns. These feeder funds are now the targets of litigation from investors, seeking to reclaim the huge fees these funds collected on Madoff’s bogus returns.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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