Hoyder Asia is a hedge fund firm based in Shanghai, with offices in Hong Kong and London and some $4.6 billion in assets. The firm’s global macro and long-short equity hedge funds have performed impressively, with the equity funds even reporting gains in 2008, and the firm has won numerous awards from organizations including Alpha and Institutional Investor, according to its website.
There is just one catch: There is no evidence that these funds exist. Hoyder has never won any awards from Institutional Investor, Institutional Investor’s Alpha or AsiaHedge, nor has it appeared in any of these publications’ rankings of hedge fund firms or extensive editorial archives. Much of the language in the firm’s “Welcome Message” is lifted straight from the website of Value Partners, the largest and one of the oldest established hedge fund firms in Asia. And it is impossible to track down Christopher W. Graham, whom Hoyder lists as its chairman and chief investment officer. Though a receptionist answers the phone at the London office, calls are routed immediately to a voicemail box with a generic, nonpersonalized greeting. During one such call, when Alpha asked to speak with Graham, the person answering the main line was not familiar with Graham and transferred the caller straight to the same voicemail box. Calls to the firm’s offices in Hong Kong and Shanghai were not returned.
The firm is marketing its funds in China but is not registered with any of the relevant regulators in Asia, according to a Shanghai-based hedge fund researcher. A search of Chinese-language websites turns up numerous articles mentioning Hoyder Asia and insinuating that the firm has stature comparable to that of major institutional hedge fund firms such as D.E. Shaw, this person says.
It is unclear whether Hoyder manages any outside money. And it is unlikely that sophisticated institutional investors would put money into a firm that failed such basic tests of due diligence. But as the Bernard Madoff Ponzi scheme illustrated, sometimes even so-called sophisticated investors entrust money to firms that ultimately turn out to be frauds.
“The reality is lots of institutional investors don’t have as much experience with hedge funds as they tell clients,” says Christopher Miller, founder of London-based Investment Quotient, a consulting firm that performs due diligence on hedge funds for investors. (Miller has not evaluated Hoyder Asia.) “They do what they think is due diligence, but it’s not what we would call due diligence.”
Randy Shain, founder of the New York firm First Advantage BackTrack Reports, which conducts investigations of financial services firms for clients, says that wealthy individuals — even highly successful entrepreneurs — also frequently lack the skills to evaluate hedge fund managers.
“Regardless of how well they have done in business, that does not translate to investing skill,” Shain says. “[Despite] the fact that you started a business, sold the business and accumulated wealth, you are much easier to hoodwink than the typical operational due diligence officer at a fund of funds or a large investment bank.”
Because of this, the fact that a hedge fund is targeting individuals — apart from managers who are raising money from friends and family in their early days — is a red flag in and of itself, says Shain, who has not evaluated Hoyder Asia.
On its website Hoyder says the firm runs absolute return funds marketed “mainly to sophisticated individual investors,” including funds authorized for sale in the UK and Hong Kong, in addition to a “non-authorized Global Macro strategy hedge fund” and a private equity fund. It claims it is licensed by the Financial Services Authority to perform investment and advisory services, but the firm did not turn up in the UK’s Financial Conduct Authority’s register. Asset management firms with offices in the UK are required to register even if the office is just for marketing.
Hoyder claims it was founded in 1999 and that it is licensed by the Financial Services Commission in the British Virgin Islands, though no record of the firm’s registration could be found on the FSC’s website. Hoyder’s website says the Hoyder Global Fund Class A, a long-short equity fund, launched in March 2001 and managed nearly $1 billion in assets as of the end of 2012. The firm’s website claims the fund has returned 412.73 percent since inception, or 14.07 percent annualized, through August 5 of this year. That includes a gain of 8.41 percent in 2008 — a year when the average equity hedge fund lost more than 18 percent, according to Chicago-based industry tracker Hedge Fund Research — a nearly 20 percent gain last year and only two down years (with the fund never losing more than 5 percent in a single year).
The price of admission for such strong performance? A mere $30,000. That’s chump change for an institutional investor, but for individuals, that can comprise a significant portion of their life’s savings.
Interestingly, the website carries warnings about the risks associated with investing and cautions investors that authorization by the Financial Services Authority, the former markets regulator in the UK, is not an endorsement and does not guarantee that an investment is right for all investors. But the fund is not authorized with any regulator in the UK. A look at Hoyder’s website reveals other red flags, including broken English and a lack of biographical detail for any of the employees it lists.
DUE DILIGENCE EXPERTS AGREE that investment scams are easier for criminals to pull off in Asia. “In China, you can kind of say anything about yourself because the country doesn’t have what we would consider to be a functional court system; there is not really a regulatory apparatus, and there is no free press,” says Shain. “In the U.S., it’s time-consuming and expensive, but it’s possible — we do it at the time — to prove whether someone is at least trying to do the right thing. In Asia, I don’t know if [fraud] is happening more, but it’s easier to do there. It’s easier to get away with because it’s more opaque.”
But that does not mean it doesn’t happen in the U.S. On August 13 the Securities and Exchange Commission filed fraud charges against Anthony Davian and Davian Capital Advisors, his Ohio-based firm. On its website, the firm purports to be “an Akron, Ohio-based global alternative investment firm” that operates two hedge fund strategies for institutional and wealthy individual investors. Anthony Davian claimed he managed a portfolio of highly successful hedge funds, but the SEC alleges that Davian actually raised $1.5 million from investors and used the money for personal expenses, including a home and a new car.
Davian distributed marketing materials with false information, the SEC alleged, but the 34-year-old also cultivated a big following on various social media platforms such as Twitter, YouTube and Facebook, according to a July 15 report by the Southern Investigative Reporting Foundation. Davian, who attracted nearly 5,000 followers by tweeting under the handle @hedgieguy, boasted that his funds achieved stellar returns. But a background check revealed numerous troubling items, including the fact that Davian did not graduate from the University of Akron, as he claimed, and that his purported Sharpe ratio was too high for the type of risk a long-short equity fund would assume, according to the report.
The Davian saga highlights a scenario that opponents of the Jumpstart Our Business Startups (or JOBS) Act fear. A provision of the act will allow hedge funds to advertise, and some industry observers warn that fraudsters who have never managed money in their lives will claim to be hedge funds and will try to lure individual investors with slick marketing materials and promotional campaigns.
Shain concedes that the JOBS Act could make it marginally easier for fraudsters to gain visibility — “there is no question you are going to draw some people into using that for their latest scam” — but he points out that scammers will go on trying to recruit individual investors by any means and are not likely concerned with whether or not it is legal for them to advertise. Regardless, experts say, investors need to perform basic due diligence — a task most Davian investors appear to have overlooked.
“Investors need to look at hedge fund managers, operations, administrators, all the people in the chain,” says Investment Quotient’s Miller. “You need to be looking at service provider agreements and seeing what could go wrong. You have to think about, what are the holes here?”
Another way investors can protect themselves: Be wary of anyone hawking the latest investment fad to individuals, Shain emphasizes, noting that most hedge fund frauds turn out not to be hedge funds at all. “Twenty-five years ago people were doing tax credit deals, then it was Internet stuff, then it was real estate,” he says. “Everything that becomes the hot new investment wave, the criminal element pretends that they are that and takes the money.”
Finally, even if a manager looks good on paper, investors shouldn’t allocate unless they are comfortable with the integrity and ethics of the people who own and run the firm, says David Perry, senior managing director of TeamCo Advisers, a San Francisco–based investment adviser. “Once you wire transfer money to a hedge fund, it is essentially free to do anything it wants,” says Perry, who recommends hiring a trustworthy outside firm to vet any funds.
Ultimately, he says, the most critical thing for investors to do is to assess specific attributes of the key people who own and run the firm — though Perry admits that making those determinations is more art than science: “If you are not comfortable that the key people are straight shooters, you should pass.”
— Additional reporting by Allen Cheng