Monday, December 15, 2008

Big Fraud in Little Madison

by Tom Bozzo

Earlier in the year I reviewed the investments held by the Madison Cultural Arts District's trust fund, which once had been intended to use stock market returns (and later alternative investment returns) to pay the Overture Center's construction debt and contribute to the Center's operations. I concluded that the fund was undercapitalized and needed to get cracking on fundraising. In September, the fund reached a point where it was to be liquidated to pay off the bulk of the construction debt, leaving the major donor and the city of Madison on the hook for the balance. We only recently, as lapsed Madison Symphony subscribers, received a fundraising letter.

An interesting detail is that when I'd reviewed the MCAD trust's assets, it held $17.9 million — just under 18 percent of its $100M portfolio of the time, in the Fairfield Sentry fund. (In early '06, they had an even greater exposure.) At the time, Fairfield Sentry was among the trust's high-flying investments, relatively speaking. I said "who knows" with respect to how Fairfield found its alpha.

Well now we know! Per Bloomberg (via), Fairfield Sentry was 100% invested in Bernard Madoff's mega-swindle! I hope they actually managed to liquidate their balance. If they did get out soon enough, then at least the MCAD trust may not have been the biggest of suckers in one respect.

Otherwise, big potential losers are Andrew Ang, Matthew Rhodes-Kropf, and Rui Zhao, whose April '08 NBER working paper concluded that funds-of-funds "on average, deserve their fees-on-fees." At a minimum, they should delete the Madoff suckers and recalculate.

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I can't believe how badly it's been managed. It seems like they made almost every mistake possible.
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