The Manhattan hedge fund saga has all the makings of a blockbuster. Twenty-nine year old Austrian com...
Among the roughly 250 investors who bought the fund were a number of high profile multi-managers and institutions. One insider described the late-January meeting in Geneva of disgruntled investors as "a who's who of the hedge fund industry". If the rumours are true, one high-profile investor was into the fund for upwards of $70m.
Of course, it is easy to be wise in hindsight, but the story Berger was telling should have rung some alarm bells - an avowed bear, a short seller of tech stocks and of the Dow, who was nevertheless making money when these areas were rocketing upward would have to be a stockpicking wizard.
But it is important to remember that the fund was surrounded by a number of blue chip names. The administrator, Fund Administration Services (Bermuda), is an affiliate of Ernst & Young. The prime broker, not charged with any wrongdoing, was Bear Stearns, a well-known securities dealer and member of the New York Stock Exchange.
The independent auditor was Deloitte & Touche which, according to the SEC allegations, was duped by Berger reprogramming his fax machine to transmit false statements adding positive stock gains to the accurate portfolio reports submitted by the prime broker. For the moment, the situation is 'all hands on deck', with just about every multi-manager and institutional investor attempting to double-check their due diligence procedures. The question is whether any reasonable level of due diligence could have picked up what is, according to the allegations, a carefully-planned fraud.
It may be that there will be more press fanfare about 'poorly regulated hedge funds.' Yet that is not the issue. As Barings, Jardine Fleming and Morgan Grenfell have shown in recent years, it is pretty much impossible to guard entirely against wilful fraud. In Morgan Grenfell's case, the company was regulated by IMRO in the UK and monitored by a number of research agencies including Standard & Poor's Fund Research. Yet Peter Young's use of Luxembourg holding companies evaded all scrutiny for some considerable time.
In the case of Manhattan, investors surely had the right to rely on what appeared to be statements from a manager audited by a reputable firm, even if these audit findings have now been withdrawn.
Any measures that enhance transparency and increase risk controls must be welcomed. A systemic flushing out must happen from time to time, as in the UK unit trust industry after the Peter Young affair. Perhaps with this sorry episode the hedge fund industry will truly begin to come of age.
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From 1 March