Bafin, the German financial regulator, sanctioned Mr. Helmut Kierner's K1 Group four times from 2001 to 2004. This past Wednesday, the authorities in Germany raided K1 Group and accused the fund-of-funds management company of fraud. According to the arrest warrant, Barclays Bank will probably lose USD220-million. Other top tier global investment banks will lose large amounts.
Hedge funds thrive on opacity. Funds-of-funds do the same. They never wish to reveal their investment strategies, even to those who front them cash for leverage or potential/actual investors. It's usually a game of "Trust us, we know what we're doing."
In today's marketplace, opacity can no longer be justified. Too many actual funds are frauds. Too many fund-of-funds either invest in frauds (as their due diligence leaves much to be desired) or are frauds investing in ghost funds.
It's a safe bet that the regulatory boom will come down on the hedge fund industry. Bureaucrats and others who most likely never enrolled in first year economics will draft or vote on legislation.
Sarbanes Oxley (SOX) was a knee-jerk response to Enron, WorldComm and other demons from the Dot Bomb craze at the turn of the century. Expect the same reaction in the coming months regarding the hedge fund industry. Sympathy could be offered, however it's drowned in the contemptuous arrogance so willingly flaunted just a short while ago.
From The Times
October 30, 2009
Barclays faces £130m loss from ‘fraud’ at German fund
Barclays may have lost as much as $220 million (£130 million) from investments with K1 Group, the German hedge fund whose founder, Helmut Kiener, is at the centre of a fraud inquiry.
The British bank’s investment, fed into K1 between 2006 and 2009, is “mostly lost”, according to an arrest warrant for Mr Kiener. The former advertising salesman was arrested on Wednesday night on suspicion of fraud and breach of trust relating to K1, a fund of hedge funds. He was still in police custody last night after a judge extended his detention yesterday.
Mr Kiener and K1 are also being investigated by the FBI. Barclays said that it was co-operating with inquiries, but would not comment further. Sources close to the bank said that provisions will have been made for any potential losses.
Other banks believed to have lost money in K1 include JPMorgan Chase, BNP Paribas and Société Générale.
Mr Kiener has been in the spotlight since prosecutors in Würzburg, Bavaria, said on Wednesday that they were investigating his activities. Police removed files after searching his home and office in Aschaffenburg. Mr Kiener’s lawyers said yesterday that no one was available for comment.
German prosecutors said that one other person was being investigated in the inquiry, but declined to say whom.
Mr Kiener, who is relatively unknown among professional investors, turned to fund management after selling advertising in telephone directories.
K1 Group’s website described him as a psychologist and inventor of the “K1 fund allocation system”. The business had almost $1 billion under management, Army Yan, a K1 manager in Hong Kong, told Hedgeweek, an industry newsletter, in February.
Bafin, the German financial regulator, censured Mr Kiener four times between 2001 and 2004. Two censures were overturned on appeal.
The criminal inquiry into K1 comes as European and American regulators, encouraged by Germany, plan new restrictions on the hedge fund industry.This month, Raj Rajaratnam, the founder of Galleon, the US hedge fund, was charged with insider trading in the biggest case of its kind for more than a decade. He denies all allegations.
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