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Money managers under the microscope

Madoff blow for funds of hedge funds

April 8, 2009

Today’s update by S&P Fund Services on its ratings for seven funds with exposure to Bernard Madoff’s fraud shows just what a blow to the fund of hedge funds industry the scandal has been.

rtxcojvS&P said that five funds of hedge funds that invested in Madoff and whose ratings it placed under review in December when the scandal broke have now been downgraded to “not rated” — Bonhote Alternative Multi-Arbitrage,  DGC Pendulum, Dinvest Concentrated Opportunities, Dinvest Total Return and RMF Four Seasons.

A further two — Constantia Composite and Constantia Low Volatility — have withdrawn from the ratings service.

S&P’s judgement was simple: “due diligence fell short of the standard expected of a rated fund”.

Most investors in funds of hedge funds were expecting fund selectors to diversify their holdings and reduce the risk of investing in individual hedge funds, whilst also avoiding the landmines.

Only a minority of such funds invested with Madoff, but the reputational damage to these funds is likely to be huge, whilst many investors are now assessing the industry’s model and deciding if this is how they want to invest in future.

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