Reeling from a lack of new investments and headline-grabbing scandals, local fund managers say things never have been tougher for their industry.
Hedge and private equity funds saw a mass exodus of investment money last fall as investors took cover amid the financial crisis.
Reverberations from investment frauds—the most famous of which is Bernie Madoff’s Ponzi-scheme—have led to increased scrutiny and skepticism from investors.
In response, the federal government has raised regulatory fees to cover investments.
And now money managers are tasked with attracting more money from clients, covering the new fees and placating existing investors.
“After the Madoff scandal I got calls from clients wanting to know, ‘Are we in that?’” said Loreen Gilbert, president of Irvine-based WealthWise Financial Services.
After Gilbert assured them that they weren’t, they wanted to know, “What am I really in?” she said.
Having face-to-face time helps money managers build trust with clients whose nerves about the current economy might send them comparison shopping.
Money managers also rely on their reputations and backgrounds, as well as referrals to draw and retain clients.
John Brynjolfsson, founder of the Aliso Viejo-based hedge fund Armored Wolf LLC, finds that having two decades in the business at Newport Beach bond manager Pacific Investment Management Co. has helped build his customer base.
Armored Wolf, which started in February and was named for a translation of its founder’s last name, manages less than $100 million from mostly family and friends.
It recently added some institutions and wealthy investors as clients, but Brynjolfsson says it’s been hard to raise money as the financial crisis has sapped wealth.
“We launched at the worst time imaginable,” he said.
At the same time, the market has been ripe with opportunities, he said.
Brynjolfsson invests in commodities, currencies, stocks and bonds, much in the same way he said he did while overseeing $80 billion for Pimco.
Irvine-based Pacific Alternative Asset Management Co., a fund of hedge funds, is being more careful with the money it has under advisement.
“Fortunately we didn’t get entangled in any of the scandals, but we take the lessons learned,” said Dorothy Walsh, an executive manager with the company. “It made us step up our game and improve our own processes.”
For Irvine-based Finance 500 Inc., a stock brokerage that manages a couple funds with less than $20 million each, dealing with increased regulatory fees triggered from the Madoff scandal has been one of the hardest adjustments since this past fall.
New mandatory audits ordered by the government that will cost the firm tens of thousands of dollars are an unwelcome result of the scandal, according to founder and Chief Executive Lance Hicks.
It also has to pay $50,000 in yearly fees for an insurance fund run by the government that was created through the Securities Investor Protection Act of 1970. That fee skyrocketed from $800.
The government’s entire $1.7 billion insurance fund was wiped out to pay $3 to $4 billion in claims related to Madoff, Hicks said.
“They screwed up, but we’re the ones who end up paying for it,” he said.
Additional regulatory requirements also could be on the horizon.
If approved, private funds will be required to register with the Securities and Exchange Commission if they manage $30 million or more.
Like WealthWise’s Gilbert, Hicks said that some of his company’s investors asked him flat out if their money is really there.
Unlike Madoff, who used his own firm to hold investments, Finance 500 uses a contactor that confirms the investments are there, according to Phil Vigil, head of fund analysis for the company.
The contractor also provides insurance, Vigil said.
Patricia Watters runs Newport Beach-based Catalina Partners, which she says is dedicated to uncovering fraud.
“People are demanding more transparency,” she said. “I’ve been told by one investment manager that an investor skipped past performance due diligence and was bold in asking, ‘Tell me why you’re not Madoff.’”
Since starting in March, the firm has been hired for a handful of projects from institutional investors.
