Learning from a Hedge-Fund Disaster

A partner in a hedge fund embroiled in a 1998 financial collapse addressed 10 common assumptions about how his firm managed billions of dollars in investments during the New York State Society of CPAs’ Investment Partnerships Conference.

“My goal is to present you with facts so you can draw your own conclusions,” Eric R. Rosenfeld, one of 16 partners with Long-Term Capital Management (LTCM), said in a keynote presentation titled, “Long-Term Capital Management Revisited: What were the lessons learned?”

Rosenfeld spoke to a packed audience in what has grown to be one of the most popular conferences offered by the Foundation for Accounting Education (FAE). Approximately 280 people attended the all-day session at the Sheraton New York Hotel and Towers attending CPE courses focused on investment regulations, monitoring hedge fund performance, and tax efficiency, among other topics.

Rosenfeld addressed the assumptions as “ten myths” about LTCM, which had as high as $1.25 trillion in investments around the world when markets—such as the bond market in Russia and the real estate market in Thailand—collapsed, threatening to take down the world economy.

“Myth Six—What happened to LTCM was a perfect storm—a 100-year flood,” Rosenfeld said, referring to a collapse in the Russian bond market that triggered a financial crisis in which LTCM lost 44 percent of its capital. “We were undercapitalized and overleveraged.”

Rosenfeld disputed the idea that a consortium organized by the Federal Reserve to cover losses and manage LTCM was a bailout for the rich.

“The partners lost everything,” he said, while only 12 of the 100 investors in the market lost anything, and only half of those lost more than $2 million. The consortium, he said, made out on it as well, earning about a 10 percent return on a $3.6 billion buyout of the firm.

Rosenfeld denied that the partners never admitted to making a mistake with the funds.

“The most important mistake we made was focusing on economic events, but we missed that the thread in all of trades was similar,” he said. “It was a failure of diversification.”

Other Speakers

In the afternoon, Gerald Ranzal, a partner with Anchin, Block and Anchin LLP, and Jack Governale, an attorney with Wolf Block Schorr & Solis-Cohen, described the nuances of Private Equity Funds (PEF). The speakers focused on how different kinds of PEF differed from typical hedge funds comprised of liquid-marketable assets that can have a distinctive affect on taxes.

“The objective, of course, is to limit capital gains” Ranzal said.

The PEFs involve partners who pay capital plus some amount of expenses to a general partner, who has five years to invest the capital, the intent being that this will be a long-term investment. The problem for accountants, Ranzal and Governale said, was valuation on financial statements. Ranzal said that one would measure the investment in a PEF by getting a “tax cost opinion” from the general partner on how he expects such investments to perform in the coming year.

Frank Attalla, an attendee who sat for the PEF session, said he was happy he had attended the conference.

“There’s a lot of new developments, and new pronouncements,” he said. “We generally keep up with these things, but it’s good to get a different perspective.”

Near the end of the day, Janice M. Johnson, a managing director with American Express Tax and Business Services Inc. and the conference chair, said she was generally positive about the Nov. 5 event, though she acknowledged that some of the seminars were packed with attendees.

“I was pleased, given what’s been going on in the city,” she said. But, she added, “The problem is this is a popular conference and people register late. More than half registered in the week prior to the conference.”

Around 350 people attended through the day—Johnson said it has been the biggest conference of the year, traditionally—up from 175 who had registered by the week before. This made it impossible for the FAE to make the proper arrangements with the hotel.

Some attendees complained about what they called “oversubscription” in some seminars that were standing room only, while others commented that the conference was very useful.

“I thought this was the best one” of the investment partner seminars, said attendee Howard Altman. “The conference had some great speakers.”