Divorce and Asset Management: Not Better, Just Worse?

Posted on July 26, 2010 by Susan Mangiero

A recent news article about a hedge fund divorce is a good reminder that pensions, endowments and foundations can be adversely impacted by personal break-ups. (See "Ikos Divorce Rattles Firm; Cash Exits, Staff Gets Ax" by Cassell Bryan-Low, Wall Street Journal, July 26, 2010). Many hedge funds take the form of partnerships or private member entities such as an LLC. When ownership is concentrated in the hands of a few individuals, key person risk merits review, along with a need to ask tough questions about whether and what type of succession plan exists should a prominent player depart from the organization. When marital splits occur and the spouse cum business owner's wealth is concentrated in the equity of the hedge fund enterprise, a judge may force a liquidation to pay alimony. All of a sudden, buy side clients could find themselves with allocations in the hands of new managers, including perhaps the aggrieved husband or wife who now owns his or her "fair" share, post marital bliss.

While somewhat impolitic to inquire about one's hubby, wife or significant other as part of a hedge fund due diligence meeting, an institutional investor is certainly within its rights to ask about how the ownership of the fund as a business might change with a marital dissolution or a disagreement among partners or both. The issue is significant enough that some hedge funds have asked key employees to sign a post-nuptial agreement with the Mr. or Mrs as a way to protect company assets.

Ain't it romantic?

Editor's Notes:

  • When I was an appraiser and valued business interests such as ownership in a hedge fund, I co-authored "Complex Compensation Issues in a Divorce" (Forensic Accounting in Matrimonial Divorce, Journal of Forensic Accounting, 2005) with divorce financial planner, Ms. Lili Vasileff .
  • One of the few articles I've read about hedge fund succession planning is entitled "Planning for Hedge Fund Manager's Success" (Institutional Investor's Alpha, April 2004) by prominent investment attorney Stephanie Breslow.

 

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New Report on Endowments and the Shadow Banking System

Posted on July 18, 2010 by Susan Mangiero

In a new study by the Tellus Institute, wealthy college and university endowments are described as being over zealous with respect to investment risk-taking in recent years. Related losses during the financial crisis arguably account for school staff layoffs, major budget cuts and postponed construction projects. Local businesses have been hard hit too as part of the trickle-down argument against allocating to "large illiquid investments" by academic money pools, courtesy of successful graduates.

In its examination of a few of the U.S. ivory tower giants, authors had some harsh words for those who may have turned from protecting principal and "generating reliance income" to instead rely on "radical diversification" into venture capital, private equity, hedge funds and real assets. They question the existence of possible conflicts of interest when Wall Streeters serve as trustees. Compensation levels for professional endowment investing teams are likewise called into question. 

I plan to spend more time reviewing the 104-page publication as it includes many statistical tables that describe individual endowment holdings as well as the financial strength (or lack thereof) of certain schools. I am also curious to get this take on the endowment model. The flip side of course is that experienced financial professionals (whether trustees or part of a school's investment team) can add more value than someone with little or no asset management knowledge and, in a competitive world, they can command a handsome compensation package. Then there is the issue of being an alternatives wet blanket. I've long maintained that no investment is good or bad on its face and must absolutely consider a variety of facts and circumstances.

One wonders if there will be a renewed call for a study about whether to tax wealthy college endowments as proposed by the Massachusetts House a few years ago? See "Should huge college endowments pay tax?" (Christian Science Monitor, May 20, 2008).

This 104-page publication entitled "Educational Endowments And The Financial Crisis: Social Costs and Systemic Risks In The Shadow Banking System: A Study Of Six New England Schools" (May 27, 2010) is available for no charge.

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