Following the Madoff scandal and liquidity pressures of 2008, hedge fundof- fund (HFoF) managers say their game has changed from one of ensuring ‘access’ to rare and skilled managers to ‘process’, in which research and due diligence on underlying managers should deliver sound strategic advice and identify poor funds. The theme of access to rare hedge fund talent drove many HFoF sales pitches in the years preceding the financial crisis, but diminished in importance after Madoff and a period of widespread losses and liquidity pressures. Institutional investors are now putting more emphasis on the due diligence that HFoFs perform on managers, and want more insight into their investment processes.

“The story of access became less important as process became more important,” Girish Reddy, managing partner of New York’s Prisma Capital Partners, said. “Process had never been tested before.” Reddy founded Prisma in 2004 with two other former Goldman Sachs executives. In the past, Prisma said its place among the Goldman Sachs alumni enabled it to access and crossreference prime hedge funds. According to Reddy, about 30 of the best 100 hedge funds worldwide are run by former Goldman Sachs staff. Prisma’s place in this alumni “is very helpful in terms of reference checks” because being able “to find out what people think about someone else is very valuable”. “But that shouldn’t be the cornerstone of out story.

It allows that access to get played up too much.” According to Alex Balfour, who runs the Hong Kong office of Ivy Asset Management, which is owned by BNY Mellon, “access was always slightly overblown” and now institutional investors sought openness and more sophisticated services from HFoFs, such as manager research or advice on hedge fund strategies. “Until two or three years ago, people were just looking for products. Now sophisticated investors want advisory and knowledge transfer,” Balfour said. But in a sign that the “access” game is over, Ivy should expect a tough time living down its exposure, however indirect, to the Madoff Ponzi scheme. The manager appears 21 times in the Madoff ‘victim list’ published by the trustee liquidating the Ponzi scheme.

However, Jamie Brookes, global head of asset management communications at BNY Mellon, said these investments were made by funds to which Ivy was a sub-advisor, and that Ivy did not recommend the allocations to Madoff. The Ivy clients listed by the trustee include Beacon Associates, the Engineers Joint Fund and the Howard Hughes Medical Institute. But Lawrence Simon, who co-founded Ivy with Edward Wohl, was listed alongside Ivy as a Madoff investor on nine occasions. But Brookes denied that any proprietary HFoFs run by Ivy were invested in Madoff.

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