A number of prominent investment industry professionals have recently grabbed headlines by casting
funds of hedge funds as the primary accessories in Bernard Madoff’s alleged fraud. Labeled “a cancer” by
one and casting the industry as broadly responsible for investors’ misfortune by others, funds of hedge
funds have taken much of the brunt in the aftermath of the scandal. Funds of hedge funds, after a year of
brutal markets, now face a formidable reputational assault.
As advisors to a broad group of institutional investors, funds of hedge funds, and single-manager hedge
funds for the past several decades, we’d like to offer another perspective on the situation. Clearly there is
an understandable temptation during a scandal of this magnitude to throw the baby out with the bathwa-
ter. But we believe the critiques to be both simplistic and, largely, wrong.
Let’s start with a few simple facts about funds of hedge funds and the Madoff scandal:
Fact 1: very few funds of hedge funds, and no institutional leaders, actually invested with
Madoff. Although the capital invested by several funds of hedge funds was enormous and repre-
sented a substantial percentage of the overall assets, only two of the top 20 funds of hedge funds
(which represent approximately 50% of the total assets in funds of hedge funds) are known to have
invested in Madoff. Importantly, neither of the two firms is regarded as an institutional market leader.
In fact, in a review of the top 50 funds of hedge funds, none of the firms regarded as institutional lead-
ers, are known to have invested in Madoff.
Fact 2: many funds investing in Madoff actually were single-manager “feeder funds,” not
funds of hedge funds. Many of the vehicles committing assets to Madoff simply served as marketing
conduits for the underlying manager. Few, if any, prominent institutional investors use these struc-
tures. Sophisticated institutions employ funds of hedge funds to access a diversified portfolio of qual-
ity managers. Although thes