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A HF manager's 12% return guarantee: financial innovation or the next Madoff?


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Some incredible stuff going on here. If you ever wonder pension fund managers get a bad rap, look no further.

The offer was eye-catching: an investment assured of returning 12% a year. It was pitched to three public pension boards in Louisiana.

 

Behind the offer stood Alphonse Fletcher Jr., a New York hedge-fund manager who made a splash on Wall Street in the 1990s, reporting 300%-a-year returns at his firm. Later, the flagship fund of his Fletcher Asset Management told of going 11 years without a single losing month.

 

Though the 12% proposition offered them in 2008 struck one Louisiana pension-board official as possibly too good to be true, the boards were assured they could bank on a set return for a simple reason: Any shortfall would be made up by other investors.

Fletcher reported to the Securities and Exchange Commission a 2009 year-end total for assets under management of $558 million. Yet its primary investment vehicle held just $187.8 million of securities, according to the firm's financial reports. And these made up 95% of the firm's market investments, according to a Fletcher consultant's report filed in a New York state court.

 

This would translate to a 2009 year-end total for the firm's market investments of about $198 million, more than half of it the Louisiana pension funds' money.

 

The SEC is less than crystal clear about how managers should calculate assets under management. It says to "include the securities portfolios for which you provide continuous and regular supervisory or management services."

 

...

 

Mr. Fletcher gave an example: If investors put $2 in one Fletcher fund, and this fund borrowed $1, and then put the money in a second Fletcher fund, that would make $5 the firm managed, he said.

::)

http://online.wsj.com/article/SB10001424052702303848104576383973388441728.html

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