Was Hedge Fund Falsely Accused of Malfeasance?

(August 2, 2011) – A joint statement issued by the three Louisiana pension funds that were concerned with the liquidity and reporting practices of Fletcher Asset Management (FAM) revealed not only that Fletcher’s financial statements are up-to-standard but also that the return on the funds’ investments has been very strong.

A team that included executives from all three funds as well as a principal from the investigative and dispute services department at Ernst & Young visited Fletcher to conduct an investigation of the hedge fund’s practices.

Their findings, which were revealed in the statement, were largely inconsistent with the funds’ concerns. “The management and staff of FAM have been completely open and forthcoming with regard to all documents requested by the team,” the statement reads, “…FAM has presented documentation and financial statements indicating that the fund has assets exceeding the value of the systems’ investments and earnings showing more than $40 million in profit on the systems’ original investment.”

Earlier in July, aiCIO reported that the funds – the Firefighters’ Retirement System of Louisiana, the Municipal Employees’ Retirement System of Louisiana and the New Orleans Firefighters’ Pension and Relief Fund – expressed concern over their investments in Fletcher’s Income Arbitrage Fund (FIA), which totaled around $100 million.

Specifically, two of the pension funds attempted to withdraw funds in March but their request was denied and they were instead issued promissory notes that would mature in two years. In a statement released by the pension funds when the concern was first raised, the funds said that the issuance of promissory notes in lieu of cash “gives rise to questions regarding the liquidity of the FIA fund and the accuracy of the financial statements issued by two renowned independent auditors.” The funds’ concerns also prompted an SEC inquiry into Fletcher’s practices, which is ongoing.

Although the most recent statement from the funds says that the Ernst & Young accountant will remain at Fletcher until his report is complete, indications are that the original concerns from the funds will be assuaged. The recent statement asserts that the financial statements are accurate, but it remains unclear why Fletcher issued the promissory notes instead of allowing the funds to withdraw their investments as cash. In spite of the 40% cumulative return on the pension funds’ investments, the notes may indicate that questions initially raised about Fletcher’s liquidity persist.

The investments that the funds made in FIA were intended to produce returns between 12% and 18%. If returns were lower than 12%, Fletcher would skim returns from other investors to reach the 12% threshold; if returns were greater than 18%, the pension funds would forfeit the excess return to Fletcher. Because FIA invests in other Fletcher vehicles, it is specifically designed to be especially appealing to investors: in the past 11 years, it has not experienced a single month of negative returns, and in 2008 FIA returned 12.6% despite overall losses of 42.8% for the Fletcher vehicles in which it invests.