Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [28]
One reads about hedge fund squash champions, marathon runners, hang gliders, bikers, and triatheletes. That has nothing to do with whether a money manager will be successful. But I shouldn’t sell sports short. After running a marathon, I had shin splints for three months. It gave me more time to read annual reports, and that is useful when one is managing money.
It seems that hedge fund managers spring up out of nowhere. Many have addresses in New York, London, Chicago, Los Angeles, and other locations, but sometimes these managers are using the addresses of virtual offices in office buildings that provide a telephone number from which calls are forwarded to the “manager’s” cell phone. It is very easy to create the illusion of a global corporate presence in the age of the Internet. It is even easy to create the illusion of a network of legitimate people.
Last summer I returned a cell phone call from a “hedge fund manager” who said a professor I know from the University of Chicago’s Graduate School of Business was on his advisory board and the professor suggested he call me. The fellow’s story sounded odd, so I declined to meet with him. I called the professor and asked him how well he knew the man. He admitted to being on the man’s advisory board; but he was about to meet him for the very first time. When I asked the professor why he would lend his name to someone that appeared to operate from a cell phone, he said the man dropped other names and said he had raised $10 million. I told the professor: “I raised $50 million. See how easy it is to say that?” It is also easy to drop names and numbers! While the fellow may be legitimate, the professor had no way of knowing that. It is dangerous to lend one’s name to a total stranger. Warren likes to look people in the eye.
In June 2005, I was surprised to get an e-mail from Chris Sugrue, then chairman of Plus Funds. He invited me to some hedge fund events organized in concert with the development office at the University of Chicago:
The University and alumni in the hedge fund industry are working together to provide additional networking and educational events in the future. We’ve put together several hedge fund events over the past two years. . . . Starting July 1, 2005, future hedge fund events will only be open to those who are $2,500+ annual fund [of the University of Chicago] donors.
Sugrue had an undergraduate degree from the University of Chicago, but did not have an MBA, and somehow had gotten names of Graduate School of Business alumni to solicit. I wrote back to Sugrue asking for an explanation. I said that I found his e-mail solicitation “pretty shameless.” My firm and nine others had already contributed funds to the Finance Roundtable so that students and alumni could attend for free. We gave hedge fund seminars usually discussing the risks; I had given one myself; they were open—and would remain open—to everyone.
The alarming part was Sugrue’s Plus Funds’ association with Refco, where Sugrue had once been an executive. Plus Funds’ investor money had been commingled with Refco’s in an unregulated account. When Refco filed for Chapter 11 bankruptcy protection on October 17, 2005, Sugrue demanded that the money be moved to segregated accounts, and the money was moved to accounts at Lehman Brothers Holding Inc. Refco creditors naturally wanted the money back. One wonders why the money was not in segregated accounts in the first place. Refco had lent money to Sugrue for various purposes including $50 million, of which $19.4 million went to an entity controlled solely by Sugrue.12
Court documents state that “Upon information and belief, Sugrue has fled the United States and currently resides in Angola.”13 Angola is a lousy venue for hedge fund conferences. Greg Newton pointed out in his blog, Naked Shorts, that the bad news is Angola