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Merseyside Pension Fund to invest in PAAMCo’s FoHFs after all

Tuesday, November 16, 2010
Opalesque Industry Update – Fund of hedge funds (FoHFs) firm Pacific Alternative Asset Management Co. LLC (PAAMCo) has been embattled with one of its seeders about a contract for more than a year now, and the ruling this summer, which gave a significant stake to the seeder, caused great concern among some of its institutional clients. One of them, however, after putting an investment on hold, announced last week a new mandate following a satisfactory due diligence review.

A Manhattan District Court Judge gave hedge fund seeder S. Donald Sussman, founder of the hedge fund Paloma Partners, a 40% equity stake in the $9bn firm PAAMCo at the end of August. The fund management firm had a month to decide whether to appeal the decision.

According to Dow Jones, the judge, in a court case that lasted more than a year, also ruled that PAAMCO owed Sussman $19m in outstanding interest for seed capital of up to $2m Sussman provided since 2000 through his company Franklin Realty Holdings.

Sussman’s seed investment in PAAMCo was recorded as a convertible loan, so that the FoHFs house would "qualify as a women-owned business and Sussman wouldn't need to disclose an ownership interest," said the judgment. The fund house was indeed run by Ms. Buchan The arrangement with Mr. Sussman “may have been designed to mislead a number of observers, from the tax authorities to the SEC to entities wishing to invest in women-owned businesses,” the Judge wrote in a ruling, said NYTimes.com. Some states like Illinois and Ohio and corporations like Verizon steer a portion of their pension fund business to investment companies owned by women or minorities, which often fall into the category euphemistically referred to in the industry as “emerging managers” said the paper.

But PAAMCO, which has offices in California, London and Singapore, ceased to be a business majority-owned by women later, according to sources. The same sources also told Opalesque that PAAMCo had decided not to appeal the ruling after all.

Sussman took the FoHFs house to court in March’09 as the agreement was about to expire and PAAMCO did not want the loan to be converted into equity. In a countersuit, PAAMCO’s founders claimed the interest Mr. Sussman had charged them violated state laws that set maximum rates on loans, said NYTimes.com.

The August ruling activated, a few weeks ago, a formal investigation by the enforcement division of the SEC in New York. PIonline.com also reported that Los Angeles Water and Power Employees' Retirement Plan had terminated PAAMCO, that Pennsylvania State Employees' Retirement System, had placed PAAMCO on watch, and that UK’s Merseyside Pension Fund, had postponed hiring PAAMCO as a hedge fund consultant pending further due diligence. And this month, the Kansas City Public School Retirement System (KCPSRS) Board of Trustees' agreed to strip PAAMCO of its $18m mandate.

Stephen Oxley, PAAMCO’s managing director and head of the firm’s London office, chaired last week’s HEDGE 2010 conference in London on the first day (see Opalesque Exclusive: The matter of hedge fund fees Source). The responsibility included moderating a panel of investors, in which Paddy Dowdall, investment manager at the Merseyside Pension Fund, participated. Neither had known that they would be sitting at the same panel, and this was certainly a potentially awkward situation. Oxley adroitly announced, however, that Merseyside Pension Fund would indeed invest in PAAMCO’s funds after all. The pension fund has been investing in hedge funds since 1988, said Dowdall, so it is well versed in matters of alternative investments.

A confirming report from PIonline.com last Friday said that Mersey planned to triple PAAMCo’s FoHFs mandate to GBP75m ($120m), following a satisfactory due diligence review conducted the previous week.

– B. Gravrand.

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