Connecticut Forms Hedge Fund Task Force In Wake Of Bayou Fund’s Demise

by Carla Johnson, Investors Offshore.com

01 September 2005

Regulatory officials in the state of Connecticut are to form a task force charged with examining options for reform of the hedge fund industry following the collapse of the Bayou hedge fund last month.

The state of Connecticut is home to numerous hedge fund operations in the United States due to its close proximity to New York, and according to state Attorney General Richard Blumenthal, the move could have ramifications for the hedge fund industry beyond the state's own borders.

"I think it may be a defining moment in the hedge fund industry's development," Mr Blumenthal, who will head the new task force with the state's banking commissioner, commented in a report by Newsday.

"This instance may be simply one major alarm bell for the broader public," he added.

The task force is being formed in response to numerous complaints from investors with the money management firm Bayou Group, after it failed to honour a promise to refund more than $400m by mid-August.

The founder of Bayou, Samuel Israel III, abruptly shut down the fund in July, saying that he wanted to spend more time with his children after a messy divorce. On August 11 he wrote to investors that 90% of their money would be returned within a week and the remainder by the end of the month. Unusually, Bayou rules allow investors to leave the fund at any time, unlike many hedge funds which have lock-up arrangements. Bayou also did not charge a management fee; its management simply took the standard incentive fee of 20 percent of profits.

However, in a further twist, on Monday it was reported that an investor who visited Bayou's deserted offices on August 16 found a typed six-page letter on CFO Daniel Marino's desk that began, "This is my suicide note and confession."

Earlier this year, Bayou Securities LLC reported to investors that it had assets of $440 million, down from more than $500 million last year. For the first six months of 2005, Bayou documents show gains of 4.56%.

However, Bayou's offices in Stamford are now empty, and officers of the company do not return phone calls, according to reports.

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