Born into money, engaged to Uma Thurman, master of the hedge fund universe, philanthropist - life's been good to Arpad Busson. Then came the subprime crash and Bernard Madoff
KEY POINTS:
Arpad Busson is angry. He's just looked at the latest returns of a hedge fund he used to invest in; it's down more than 60 per cent in the past nine months.
"That a-hole!" Busson says of the fund's New York-based manager, as he walks out of the conference room at the Mayfair offices of EIM, the US$11.5 billion ($22.7 billion) fund-of-hedge-funds firm of which he is founder and chairman.
Though EIM yanked its money out of the fund in April last year, when it was down only 25 per cent, Busson says there are too many like it out there.
"If these managers are not focused on preservation of capital, they should not have the right to manage other people's money."
Busson's opinion matters. Since he launched EIM in 1992, he has been instrumental in luring billions of dollars of public and corporate pension money into his and other funds of funds. The industry, which Busson helped pioneer, allows investors to spread their risk among hedge funds with different strategies.
The number of funds of funds has swelled to 2500 from fewer than 100 20 years ago and the amount of money they manage increased eightfold to US$826 billion as of last June.
But the global financial crisis has sent that growth into reverse and fund-of-fund firms are now closing, along with the hedge funds they invest in.
Busson, 45, a French-born child of the European financial aristocracy, started his career as a high-priced matchmaker, pairing new-world hedge fund managers with old-world money.
He parlayed that into a fund-of-funds business that's paid off handsomely.
EIM's funds gained an annual average of 12 per cent from 1996 to 2007 and before the crisis London's Sunday Times estimated his wealth at 250 million ($703 million).
As Busson's influence has grown, so has his social profile. Busson, known as Arki, was for years photographed on the arm of supermodel Elle Macpherson, with whom he has two children, and he's now engaged to actress Uma Thurman. His annual ball for the charity he helped start, Absolute Return for Kids, or ARK, is a must-go event for London hedge-fund moguls.
"He's become a celebrity larger than the hedge fund industry," says Ian Morley, founder of Wentworth Hall Consultancy, a London-based adviser to hedge funds and funds of funds.
Busson is now struggling to contain his clients' losses as the global stock, bond and commodities meltdown slams the hedge fund industry and the funds of funds that depend on it. More than 100 funds of funds shut down between June and October and many face a flood of redemptions from both individual and institutional investors.
EIM had its first losing year last year; Busson says its accounts lost 8-19 per cent.
And in mid-December EIM revealed it was one of at least a dozen funds of funds caught up in the massive alleged fraud perpetrated by New York investment manager Bernard Madoff.
Busson says US$230 million of client funds were invested with Bernard L Madoff Investment Securities - 2 per cent of EIM's assets. Madoff may have lost as much as US$50 billion in what prosecutors say he himself described as a "giant Ponzi scheme", in which he paid redemptions by existing investors with new investments.
"Catching a fraud is practically impossible," Busson says. "There's only so much due diligence you can do. This was not an obscure little manager in the boondocks. He seemed like a very experienced, knowledgeable, trustworthy man - like the best con artists always are."
But John Godden, chief executive of London-based IGS Group, which advises hedge funds, says any fund of funds that gave money to Madoff didn't probe deeply enough. "It really undoes any pretence that these people were doing proper due diligence," Godden says, declining to comment specifically on EIM. "People are going to be questioning the processes that funds of funds were going through to assess investments."
The Madoff scandal has heightened investor scepticism of strategies in which they end up paying two sets of fees. Hedge funds typically take 2 per cent of their assets as a management fee and 20 per cent of profits, while most funds of funds charge an additional 1 per cent of assets and 10 per cent of profits.
EIM, which creates customised accounts, charges 1 per cent of assets and 5 per cent of any gains, Busson says.
"There's been a huge mismatch between what's been promised by funds of funds and what's been delivered," says Kerrin Rosenberg, chief executive at Cardano UK, which advises pension plans and other institutions with about 50 billion under management.
"Many of these pension plans regard their investments with funds of funds as an experiment, and towards the end of 2009 they're going to conclude it has failed and they won't invest in them again, ever."
Busson predicts that the global plunge in stock and commodity prices and the world economic slowdown will kill as many as half of the world's hedge funds, and he says the culling of weak funds is "very healthy".
But he says there's still a role for funds of funds like his, because institutional investors find the screening and monitoring of hedge funds too time-consuming and expensive to do themselves. He also notes that EIM, and hedge funds generally, have performed better than the market.
EIM's 12 per cent average gain through 2007 compares with 8 per cent for the Standard & Poor's 500 Index and 8.6 per cent for the Fund of Funds Composite Index published by Hedge Fund Research.
Busson is personal friends with some of Europe's and America's wealthiest investors. "He's been a pioneer," says Morley. "With his combination of energy, focus and his contacts, he took managers from America and introduced them to European investors."
Busson sees his job as finding hedge fund managers who can produce "alpha" returns that beat the benchmarks for stock, bond and commodity performance. He leads a team of 205 analysts who scour the world for new talent and track the performance of 1000 hedge fund managers.
They work from EIM's headquarters in Nyon outside Geneva and the firm's small London office.
EIM - originally European Investment Management - creates tailor-made portfolios of hedge-fund investments for clients based on their individual needs. If a client wants a fund with no emerging-market exposure or wants his portfolio locked up for one year instead of three, Busson's team will come up with a basket of hedge funds that meets that requirement. EIM currently runs 110 separate accounts that invest with 150 different hedge-fund managers.
Busson says EIM started pulling back from certain funds in February 2007, when credit markets began to wobble. EIM sold out its positions in 42 funds in 2007 and fired another 64 managers last year, while taking on 24 new managers.
Busson says in some cases the trigger was a shutdown in communication between fund managers and investors. "When there's turmoil, transparency is king," he says.
One hedge-fund strategy Busson fled is convertible arbitrage, in which a fund buys convertible bonds, which can be converted into shares at a certain price, then sells short the underlying stock to hedge the bet.
Such funds suffered grievous damage from the bans and restrictions on the shorting of stocks imposed around the world in September and October. As of mid-December, less than 4 per cent of EIM's portfolios still had exposure to convertible arbs. "If I was such a genius, I would have cut everything out," Busson says.
Last year, Busson says EIM increased its exposure to macro-trading strategies, in which funds bet on broad swings in the economy. EIM is also invested with commodity trading advisers. "There are managers making money," Busson says. "Strong organisations with strong risk controls will survive and prosper."
The Madoff loss is by far the biggest of several EIM missteps. Busson says EIM had US$9 million of client money invested in the Bear Stearns hedge funds that went belly up in July 2007, touching off the meltdown in mortgage-backed securities.
Another EIM holding that was a casualty of the crisis was Drake Capital Management, a New York-based money manager which is liquidating three of its funds.
EIM also put money into some of last year's best-performing hedge funds, including about US$400 million in Paulson Advantage Plus, a Paulson & Co fund that was up by 29 per cent through October. Another winner was Brevan Howard Macro, run by London-based Brevan Howard Asset Management, up 19 per cent through October.
Even as he manoeuvres through the financial crisis, Busson continues to spin in London's social whirl. The tabloid press portrays him as a wealthy playboy jetting between his townhouse in southwest London and his villa in the Bahamas. Busson counts Madonna, Hugh Grant and former US President Bill Clinton as friends. He knows Clinton through their joint charity work.
Reflecting his near-iconic status in the hedge fund world, Busson appeared as one of the gods floating in the clouds in The Art of Hedge, a sequence of drawings and silkscreens by London artist Adam Dant, which hung in a Mayfair gallery in 2007.
Busson reserves his rare explosions of anger for hedge fund managers who lose money, friends say. When entering buildings he opens doors for others and gushes about the generosity of fellow hedge fund managers who give to charity.
"He's charm personified," says Nick Finegold, founder and executive chairman of Execution, a London-based investment bank that annually donates a day's trading proceeds to charity, with a third going to ARK. "He has complete command of the words 'please', 'thank you' and 'well done'."
Busson took up with Macpherson in the mid-1990s. The pair broke up in 2005 without marrying, and split custody of their two sons, one of whom counted the late Italian car tycoon Giovanni Agnelli as godfather.
In announcing their separation, they issued a joint statement saying, "We have had, and in many ways continue to have, a wonderful relationship, which has produced two beautiful children."
Busson, who sports longish brown hair and beaded necklaces and bracelets, met Thurman, 38, star of the movies Pulp Fiction and Kill Bill, at a private dinner in Rome in 2007. The pair began a whirlwind romance, holidaying in St Tropez and on a yacht off Sardinia. They have also attended high-profile events around the world, including Nelson Mandela's star-studded 90th birthday party in London's Hyde Park in June, singer Elton John's 10th White Tie and Tiara benefit for Aids at his British manor home and the 2007 Nobel Peace Prize award ceremony in Oslo.
They were the toast of ARK's June dinner, held at the Royal Naval College in Greenwich and attended by 1000 people, including leading hedge fund managers. Tables sold for 100,000 and ARK auctioned off a bit role in Thurman's next movie, Eloise in Paris, to an anonymous bidder for 450,000. In six years, ARK has raised and given away more than 100 million.
The couple announced their engagement in June by throwing a lavish party at Busson's London home for guests including Elton John and Sting, supermodel Claudia Schiffer and artist Damien Hirst.
Busson's high standing among European investors can be traced partly to his family roots in the world of international finance. His step-grandfather, Arpad Plesch, was a Hungarian-born financier who earned his fortune from businesses around the world, including a large stake in the Haitian-American Corporation, which owned sugar plantations.
Plesch, a lawyer, was famous in the 1930s for suing governments that abandoned the gold standard written into the contracts for international bonds he owned.
Busson says Plesch won cases in France and Germany, lost in the US and failed in Britain when the House of Lords overturned a potentially lucrative court verdict in his favour.
"The Plesches knew everybody," says Hugo Vickers, who edited Horses and Husbands: The Memoirs of Etti Plesch, the chronicles of Plesch's third wife. "Arpad Plesch was part of a world of people who are so rich we don't even hear about them."
Plesch first married Leonina Ulam, Busson's great-grandmother, and after she died, married her daughter, Marysia Ulam Harcourt-Smith, who already had a daughter from a previous marriage - Busson's mother Florence "Flockie" Harcourt-Smith, an English debutante.
Flockie met Busson's father, Pascal, in Paris in the 1960s. Pascal served in the French Army before going into finance, where he opened European offices for a Wall St firm called Faulkner, Dawkins & Sullivan and then headed the French operations of Lehman Brothers.
Born in Paris, Busson was raised and educated mostly in Switzerland, attending Le Rosey, a boarding school known as the "school of kings", whose alumni include the late Shah of Iran, the late Prince Rainier III of Monaco and the Aga Khan IV.
In the winter months, the school body moves to a campus in the ski resort of Gstaad. Busson grew up skiing and toyed with the idea of becoming a professional downhill racer. Instead, after school he did a one-year stint in the French Army, serving in the Alpine troops.
His career as a lord of financial middlemen began in the mid-1980s with a casual introduction to Paul Tudor Jones while the two were dining together.
Tudor Jones's Tudor Investment was the talk of the financial world at the time: it posted returns of 136 per cent in 1985 and 99 per cent in 1986. Busson began doing freelance marketing for Tudor Jones, tapping his circle of rich European friends from Le Rosey and beyond.
Busson's clients tripled their investment when Jones correctly predicted the stockmarket crash of October 19, 1987.
"In doing his research, Jones saw there was a 98 per cent correlation between the S&P of the 1980s and the Dow of the 1930s," says Busson, who was with Jones on Black Monday. "One thing is to have a vision and predict it and the other is to capture it."
Busson says Jones introduced him to Louis Bacon at a dinner party in Aspen in 1986. Bacon had just founded hedge fund firm Moore Capital Management. Busson soon began finding clients for Bacon, too.
In 1990 Jones and Bacon both hit the jackpot and cemented their reputations when they bet that the Japanese stock market, which had risen 83 per cent from 1988 to 1989, would tank. The Nikkei 225 index nosedived 38 per cent in 1990, marking the end of Japan's boom economy.
Bacon helped Busson land his next client: Julian Robertson, founder of Tiger Management - known in New Zealand as the man behind the Kauri Cliffs and Cape Kidnappers golf courses.
"Julian wanted to raise money offshore and so he asked me to help at Louis' suggestion," Busson says. Robertson declined to comment.
Busson began marketing for Robertson at the end of 1990, just as Tiger took off, and continued through 1997. Busson says he got paid for bringing in client money, declining to give details. In 1991, Robertson had US$1 billion under management. By 1998, it was US$21 billion. Through August 1998, Tiger posted an average annual return of 32 per cent.
"Arki had a genius for finding geniuses and the tenacity to sell them like mad," says Hugh Hendry, who manages about US$500 million as founder of Eclectica Asset Management in London.
Hendry says Busson convinced conservative pension funds that it made sense to use hedge funds to deploy multiple strategies that could short the market as well as invest in securities for the long term. "He was able to dispel the fear and sell something completely unconventional."
With A steady flow of wealthy clients hungry for high returns, in 1992 Busson decided to move from being an investment adviser to setting up a fund-of-funds firm.
The first funds of hedge funds were established in 1969 by Geneva-based La Compagnie Financiere Edmond de Rothschild Group and by the Belgo-Dutch bank Fortis. Funds of funds became part of pension portfolios this decade, when retirement funds seeking higher returns to meet their mounting unfunded liabilities started setting aside small amounts for hedge funds and private equity. They relied on funds of funds to monitor their hedge-fund investments and smooth out returns.
European Investment Management at first garnered clients through Busson's wealthy friends and acquaintances. In 1995 he began broadening his base by opening offices in London and New York and soliciting business from institutions.
After countless presentations at pension conferences, by 1997 EIM had about US$1 billion under management.
A milestone came in 1999 when the California Public Employees' Retirement System, the largest US public pension plan, made its first allocation to hedge funds.
From 2001 to 2003 the number of funds of funds more than doubled from 550 to 1232 as institutional investors poured in money. EIM took advantage of the boom.
By 2003 EIM's assets had swelled to more than US$4 billion. In 2004 EIM won its first account from a sovereign wealth fund, which Busson continues to service and declines to name.
Many institutional investors had started out putting money into funds of funds that offered the same mix of hedge funds to all investors. EIM won them over with its customised approach and Busson's ability to pick managers who beat their benchmarks.
EIM also lured in major pension funds because of Busson's close links to once hard-to-access hedge funds such as Tudor Investment and Moore Capital.
EIM hit a rough patch in mid-2007 as some of the funds it invested in went bust on the back of the subprime meltdown.
Still, as late as last October, EIM was winning new pension fund mandates that balanced out redemptions from other clients.
Then the alleged Madoff fraud hit. An investment with Madoff was a litmus test of whether a fund of funds did proper due diligence, says Salomon Konig, who invests about US$75 million with funds of funds as chief investment officer at Florida-based investment firm Artemis Capital Partners.
"Whenever a fund had money with Madoff, it raised a red flag," Konig says. "It meant they were chasing returns."
Busson says he thought a colleague was joking when he called to tell him Madoff had been arrested. After all, Busson says, the accused felon was a broker-dealer who was subject to scrutiny by the US Securities and Exchange Commission.
"I knew the SEC was all over this shop," Busson says. "The main reason we got comfort was that it was SEC-regulated."
In the wake of last year's financial meltdown and the Madoff scandal, new clients will be harder to find - for Busson and the rest of the fund-of-funds industry.
The reputation of funds of funds has suffered with that of the hedge funds themselves. At least 118 funds of funds closed in the four months from the end of June to the end of October, while the number of hedge funds fell by 693 in the first nine months of the year, a record pace.
"There are just too many funds of funds," says Cardano UK's Rosenberg. "They've just got to consolidate."
New York State's US$155 billion retirement system has shifted a portion of its US$5.3 billion in hedge-fund assets away from funds of funds and is investing them directly in hedge funds. ITT's pension fund and Baylor University's endowment have done the same.
Pension consultants expect EIM to weather the shakeout.
"They're better positioned to survive than most," says Phil Irvine, director of London-based PiRho Investment Consulting. "Given their size and institutional client base, they're well placed."
But "in the end, if there's no performance and no added value, then the business is kaput", says Jacob Schmidt, founder of Schmidt Research Partners, a London-based hedge-fund advisory firm.
As markets reel and the implications of the Madoff affair sink in, EIM and the rest of the fund-of-funds industry face new pressure to deliver that added value.
For Arki Busson, the scion of financial aristocracy and the squire of stars, the next year will show whether he can get his firm back into the black and restore the lustre to his glittery career.
- BLOOMBERG
