Published December 16, 2008

Madoff fraud rocks hedge funds

Industry faces crisis of confidence; HSBC, RBS, Nomura among scamster's victims

By CONRAD TAN
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(SINGAPORE) The list of firms and rich people caught up in an alleged US$50 billion fraud by US money manager Bernard Madoff grew longer by the hour yesterday, as investors worldwide scrambled to assess the damage from the biggest ever scandal to rock the global financial community. HSBC, Nomura and the Royal Bank of Scotland have just been added to the roll call of victims.

In Asia, where the immediate harm appeared to be limited, some feared the bigger impact of the scandal would be to further erode confidence in hedge funds.

Many are already reeling from huge losses due to the violent turbulence in financial markets, and even those that have performed well are facing withdrawals from clients who need the cash to cover their losses.

'The bigger risk is to the confidence of a shrinking hedge fund industry,' Peter Douglas, founder of Singapore hedge fund consultancy GFIA, told BT.

Meanwhile, banks, hedge funds, charities - including one linked to movie director Steven Spielberg - and other investors stretching from the US to Europe and Japan were struggling to estimate the cost of the massive fraud to their investments yesterday.

The staggering scale of Madoff's self-confessed 'Ponzi scheme' and the increasingly common practice of placing vast sums of money with third-party fund managers has made it difficult for firms and individuals to assess their ultimate exposure to his alleged scam.



Several major banks, including the UK's HSBC and Royal Bank of Scotland (RBS), France's BNP Paribas and Japan's Nomura, appear to have had substantial indirect exposure to Madoff's pyramid scheme, which he reportedly sustained for years by paying investors generous annual returns of about 10 per cent using the capital raised from new investors, until the scheme collapsed last week, when he was overwhelmed by requests to withdraw US$7 billion.

HSBC confirmed yesterday that some US$1 billion was at risk. Earlier, the Financial Times had reported that HSBC was believed to be facing losses through loans provided to institutional clients, mainly funds-of-funds, that invested in Madoff funds.

BNP Paribas' loss could reach 350 million euros (S$702 million). While the bank has no direct investments in Madoff funds, 'it does have risk exposure to these funds through its trading business and collateralised lending to funds of hedge funds', it said.

RBS said that it could lose up to £400 million (S$900 million) through similar exposures, while Nomura said that it has 27.5 billion yen (S$449 million) of exposure.

Others likely to be left nursing heavy losses are specialist hedge funds that invested directly with Madoff, earning millions in fees from his firm for persuading clients to put their money with him. They include Fairfield Greenwich Group, which invested more than half of its US$14.1 billion in assets with Madoff, and Tremont Group, Bloomberg reported.

Some expressed disbelief at the gullibility of these fund managers, who make a living out of helping investors choose which hedge funds to invest in.

'It's mind-boggling that people like Tremont and Fairfield Greenwich had been doing this for so long,' Brad Alford, who runs US investment advisory firm Alpha Capital Management, told Bloomberg. 'It's the job of these funds of funds to be doing due diligence. That's why they get paid.'

Here, DBS Group, OCBC Bank and United Overseas Bank all said that they had no direct exposure to Madoff funds. BT also understands that town councils here are unlikely to have any direct investments in Madoff funds as they were not registered with the Monetary Authority of Singapore and so would not be authorised investments.

A spokeswoman for the Government of Singapore Investment Corp said that it had 'no comment on the matter' when asked if GIC had any exposure to the fraud. A spokeswoman for Temasek Holdings said that it has 'no direct exposure' to Madoff funds.

Christopher Wong, investment manager at Aberdeen Asset Management Asia here, told BT that Aberdeen had no direct exposure to the alleged scam but that some of its funds may be invested in companies that could be exposed.

Not all investors were fooled by the Madoff mania. Aksia, a New York- based investment advisory firm, warned clients last year not to put their money with Madoff after learning of 'red flags' at the company, Bloomberg reported.

Among other things, Aksia had discovered that Madoff's financial statements were audited by a tiny accounting firm with just three staff - an elderly partner, a secretary and an accountant. The audit firm is now also under investigation.