(July 13, 2011) – High-profile hedge fund Fletcher Asset Management has come under question by the Securities and Exchange Commission (SEC) after it failed to meet a redemption request placed by two Louisiana state pension funds, the New York Times reported.
Three Louisiana state pension funds – the Firefighters’ Retirement System of Louisiana, the Municipal Employees’ Retirement System of Louisiana and the New Orleans Firefighters’ Pension and Relief Fund – invested about $100 million in Fletcher’s Income Arbitrage (FIA) Fund in 2008. According to the NYT, when two of the funds requested to withdraw funds in March, Fletcher denied the request and instead issued promissory notes that will mature in two years.
In a statement from the pension systems involved, they said that, “The distribution of a promissory note in lieu of immediate cash has raised concerns with each of the system’s respective boards…It gives rise to questions regarding the liquidity of the FIA fund and the accuracy of the financial statements issued by two renowned independent auditors.” According to a report from the Wall Street Journal, the Firefighters’ Retirement System of Louisiana and the Municipal Employees’ Retirement System were the two funds to initially request a withdrawal; in early July, the New Orleans Firefighters’ Pension and Relief Fund made a similar request.
This controversy follows an investment in FIA by the pension funds that promised returns between 12% and 18%. If returns were lower than 12%, Fletcher would skim from other investors’ returns to reach that threshold; if returns were higher than 18%, the pension funds would forfeit any excess return and settle for 18% returns instead, the NYT reported.
The lucrative deal was made possible by the design of FIA, which instead of investing directly in markets invests exclusively in other investment vehicles run by Fletcher. FIA, which is the flagship fund for Fletcher, would then receive favorable returns because it held “preferred shares” of the other vehicles, according to the WSJ. As a result, the fund has not had a month with negative returns in more than 11 years, and in 2008, FIA produced 12.6% returns even though the vehicles that it invested in lost 42.8%.
The SEC investigation adds to the current controversy surrounding Fletcher. According to the NYT, Alphonse Fletcher, Jr., who runs the hedge fund, sued the Dakota apartment building in New York City for racial discrimination; the Dakota is fighting the suit, claiming that Fletcher was denied an apartment because of concerns about his financial situation. Additionally, independent filmmaker Seven Arts Pictures is seeking at least $1.5 million in damages from Fletcher after he pulled out of an agreement to help fund a film.
<em>By Justin Mundt</em>