Several Swedish institutional investors have lost large amounts in a hedge fund scandal, which has been described as Sweden’s own Madoff affair. But as investors are facing up to the fact that assets are unlikely to be retrieved, there are those who question the rationality of investing in the hedge fund in the first place.

PP Pension, the Swedish pension fund for journalists, and the Volvo and Saab pension funds are just some investors that had exposure to Weavering Capital’s failed macro fixed income fund.

In March, the London-based Weavering Capital went into administration because of suspected fraud and its flagship macro fixed income fund is currently under liquidation by PricewaterhouseCoopers. Weavering has had strong links to Sweden through its owner Magnus Peterson, former head of trading at SEB.

The problems with the hedge fund were discovered after investors tried to withdraw assets and failed. It is not yet clear exactly what went wrong, but there are indications of manipulation and large transactions between the fund and a company run by “someone close to the firm”.

Swedish investment consultancy Wassum has reluctantly found themselves at centre stage of the unfolding events. The firm had advised and recommended the Weavering fund to at least five of its clients including the Saab pension fund, a local government, the Centre party and PP Pension, which lost 1 per cent of their assets. Wassum claims that it did everything in its power to ensure that the fund was a safe investment and said in a statement that its analysis had been thorough and that it would have been impossible to predict what has happened.

But is that really the case? PP Pension’s chief executive officer Viveka Ekberg, who joined the fund in February this year and was not at the helm when the investment was made, is not convinced.

“It’s important to act on warning signals that come to the surface. I’ve been made aware that there were red flags around Weavering. I’ve also been made aware that others saw this and chose not to invest,” says Ms Ekberg.

Jerome de Lavernere Lussan, managing director of UK investment management consultant Laven Partners, is not surprised that Weavering Capital failed. Laven Partners conducted a review of Weavering’s macro fixed income fund in 2007, but was far from impressed with the results.

“I would like to emphasise that we did not suspect any fraud,” he says, “but we identified a number of weaknesses in the structures of the fund. There were about 10 warning flags and the fund never made it past the first step of our screening. It simply did not seem like a good investment.” Mr de Lavernere Lussan is certain that they were not the only ones who rejected the fund.

The consultancy identified a number of problems. The structure with the clearers “did not seem smooth”, the fund did not seem to achieve what it had set out to do – to achieve certain returns with certain volatility, there were governance issues due to the husband/wife ownership structures, and the fund was operating with a very high leverage, at around 400 per cent.

“Leverage was the main concern – that is so important for our security. And during interviews, the prospectus of the fund did not seem relevant to the strategy, which instantly felt wrong. We put together all these pieces of information,” he says, concluding that there are lessons to be learnt from scandals like this.

“Many are only looking at the financial side of things, but that gives a very limited view of what hedge funds are all about,” he says. “It’s important to not only conduct surface due diligence, but to get a broader and deeper understanding. And above all, you should never invest on the basis of trust.”

To date, Laven Partners’ strategy has never failed and has protected its clients from hedge fund pitfalls such as Bayou, Lakeshore and most recently Weavering.

PP Pension’s Ms Ekberg says that what has happened will have consequences for how they work. She says: “It will affect which strategies we use and which advisers we rely on. When things like this happen, you need to re-evaluate which partners you co-operate with.”

Wassum declined to comment.

Printer friendly version

Email this article to a friend