Hedge funds, banks pile into Madoff claims market

LONDON (Reuters) - Hedge funds and banks are piling into the secondary market for claims against fraudster Bernard Madoff, buoyed by the trustee’s success in recouping victim’s cash, one of Britain’s biggest hedge fund market makers said.

Accused swindler Bernard Madoff enters the Manhattan federal court house in New York, March 12, 2009. REUTERS/Shannon Stapleton

The price of holdings in Madoff “feeder” funds such as Fairfield Sentry and Kingate has risen to 7 or 8 cents on the dollar from 1 or 2 cents six months ago on the secondary market, while buying a bankruptcy claims from a direct investor with Madoff can cost 30 or 40 cents.

“In the last three months it has increased dramatically,” said Neil Campbell, head of alternative investments at brokerage Tullett Prebon, which makes a market in these stakes.

“We’ve had these positions on our books for two years, and two years ago you couldn’t get a price. Up to six months ago it’s been one or two cents in the dollar, as optionality, but now it’s become more serious because there’s more competition,” he told Reuters.

The secondary market in hedge fund stakes has been growing in recent years as investors look for ways to cash out of funds that have locked up clients, while specialist buyers prepared to wait for their gains hunt for a bargain.


However, the market for stakes in feeder funds that channeled money into Madoff’s firm, funds of funds that invested with Madoff or claims from direct Madoff account holders has taken off recently as buyers eye the large number of lawsuits filed by trustee Irving Picard.

Picard has estimated losses from Madoff’s Ponzi scheme at around $20 billion and has already recovered about $10 billion, including $7.2 billion from the estate of long-time Madoff friend and investor Jeffry Picower. With lawsuits against a group led by Austrian banker Sonja Kohn for $19.6 billion, HSBC Holdings and a network of feeder funds for $9 billion, and JPMorgan Chase for $6.4 billion among others, there is even the prospect of victims being repaid in full.

Campbell said buyers such as distressed hedge funds, distressed desks at banks and funds of funds specializing in the secondary market are now piling into the sector.

Meanwhile, many funds of funds are trying to get Madoff holdings off their books to limit reputational damage and try and put the issue behind them, rather than hang on for extra gains.

“There are a lot of vehicles globally looking at this opportunity,” he said. “A variety of buyers are coming in, due to the success of the trustee, who has been fairly ferocious in getting results, and the (small) amount of claims made, especially in Europe, which has created a very interesting window of opportunity.”

The more valuable stakes are direct stakes. “The closer you get to investing directly the higher the bids go,” said Campbell.

Meanwhile, also highly prized are funds where few investors withdrew money, because Picard has sued investors who withdrew more than they put in, viewing their profits as merely ill-gotten gains from subsequent investors in the Ponzi scheme.

Editing by Sinead Cruise and David Holmes