Alternative Market Briefing

Other voices: FoF manager shares four easy clues why Bayou was a `no-go`

Thursday, September 08, 2005

Portfolio Managers Randall Dillard and Jeff Holland from Liongate write: Best practice for hedge funds require the involvement of independent third parties. Bayou provides an invaluable lesson for investors about when to pass on investing:

Affiliated auditor. The audit firm shared office space with Bayou, and the firms had related ownership interests. Never invest in a fund which does not use an independent (and preferably well-known) audit firm. Understand the relationship between the fund and its auditor to evaluate whether it is too cozy.

Limited Signature Controls. Make sure your cash cannot be looted easily. Don’t entrust money with a fund manager who can move money without the oversight of a respected third party. Require at least two internal and two external signatures.

Self administration. Bayou did not use a third party administrator to value investor’s accounts. Contact a fund’s administrator directly to verify historical monthly NAVs and historical AUM reported in marketing materials. Make sure that the administrator is not simply rubber stamping a manager’s valuations. Obtain, directly from the administrator, a copy of the pricing procedures agreed between the administrator and the fund manager and review to make sure that the fund manager cannot override the administrator in pricing.

Affiliated Broker-Dealer. Bayou’s trades were allegedly made through Bayou Securities, a registered broker/dealer. The broker/dealer had o......................

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