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Madoff Scandal Heightens Call For More Independent Hedge Fund Oversight

by Phillip Morton, Investors

18 December 2008

The Bernard Madoff investment scandal has highlighted more than ever the need for independence in the administration and valuation of hedge funds, according to one industry body.

“The Madoff scandal highlights just how important it is to have independence of process in relation to administration of the fund and the valuation process," said Antonio Borges, chairman of the Hedge Fund Standards Board.

He added: "It also highlights the need for robust governance practices and oversight via independent boards, which will challenge management procedures and behaviour."

Bernard L. Madoff, who ran Bernard L. Madoff Investment Securities LLC – considered to be one of the most successful hedge funds in the world – was arrested last week after being jointly charged by the Securities and Exchange Commission and the Justice Department for allegedly orchestrating a giant Ponzi scheme. According to the charges, Madoff admitted to senior employees that his fund was "one big lie" which had been paying 'returns' to certain investors out of the principle capital invested by newcomers to the fund.

It is thought that losses from the fraud could reach USD50bn, and it has since emerged that many high profile banks still reeling from sub-prime losses may have lost large stakes in Madoff's fund. It has also come to light that regulatory checks by the SEC in 2006 and 2007 failed to uncover anything suspicious, while questions have also been asked as to why Madoff did not use a custodian to hold the fund's assets, and why he chose to employ a little-known New York-based auditor while funds of a comparable size would employ a much larger audit firm.

“The hedge fund standards are designed to address exactly these issues to help prevent such events from happening, and to provide investors with the necessary transparency. This is why an increasing number of managers are signing up to the HFSB standards," Borges said.

The HFSB was formed in January 2008 to take forward the work started by the Hedge Fund Working Group (HFWG), a group of leading hedge funds based mainly in London, whose report on best practice standards was published that month.

On Monday, the Board announced that nine new hedge fund managers, from Germany, Switzerland and Asia, have now committed themselves to the HFSB’s best practice standards, bringing the total to 33.

The latest new signatories are: Allianz Global Investors (RCM), Altima Partners, Amplitude Capital, Clareville Capital Partners, Fortelus Capital Management, Frontier Asia Capital, Maple Leaf Capital, Nau Capital and Ocean Capital Associates. Of these Frontier Asia Capital is based in Hong Kong, Allianz Global Investors (RCM) is German and Amplitude Capital is based in Switzerland.

“I am delighted with the increased international representation among our signatories. As well as London, we now have managers signed up based in the US, Bermuda, Spain, Sweden, Switzerland, Germany and Hong Kong," Borges said.

“At a time like this it is essential that the hedge fund industry demonstrates that it is adhering to best practice standards," he concluded.

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