Risky Bu$ine$$
Hedge funds are lightly regulated and high risk, but they have grown over the years as a percentage of all endowment investments by colleges and universities.
By Peter Galuszka
Hedge funds are the rock stars of today’s financial world. These lightly regulated private pools of equity, which are open only to rich players, are managed through secretive and sophisticated investment strategies. Although the risks are high, so are the potential benefits. Hedge funds can pay returns of up to 30 percent or more, considerably higher than other investments such as mutual funds or bonds. Despite the risks, many colleges and universities have chosen to invest heavily in hedge funds. One of those schools is DePauw University in Greencastle, Ind.
For a small institution — approximately 2,500 students — DePauw has a rather large endowment of approximately $470 million. So it seemed like a smart idea to invest a small amount, no more than 1 percent of its total assets, in an aggressive, high-return fund. The college’s financial advisor, Hennessee Group LLC, recommended hedge funds operated by the Stamford, Conn.-based firm Bayou Fund LLC. DePauw took the recommendation and invested $3.25 million, looking at promised returns of 15 percent to 20 percent.
Late last August, as students returned to DePauw after summer break, university officials got a shock. Bayou, which was managing about $440 million in hedge funds, quietly went out of business. A telephone recording at its office said investors would be repaid. But at the end of September, the U.S. Securities and Exchange Commission filed civil charges against Bayou principals Samuel Israel III and Daniel E. Marino, claiming they deliberately defrauded investors. The U.S. Attorney General’s office filed nearly simultaneous criminal fraud charges against the duo. Both men pleaded guilty to federal fraud and conspiracy charges and together face 80 years in prison.
“All of the investors were caught off guard,” says Ken Owen, spokesman for DePauw. The college sued Hennessee in federal court last October seeking the return of its investment.
