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Recent Cases: Hedge fund investor recovers $1.3 million |
During his 2008 annual review with his GenSpring financial adviser, Macdonald was given an Investment Policy Statement (“IPS”) that proposed an asset allocation of 50% equities, 40% bonds and 10% cash or cash equivalents. The benchmark for measuring performance of the portfolio included the S&P 500 Index for the stock portion of the portfolio and the Lehman Brothers Aggregate Bond Index for the bond portion. All of GenSpring’s marketing materials touted the firm’s ability to provide “downside protection” in a declining market, and the IPS stated that with the proposed allocation, Macdonald would not lose more than -11.7% in any one year based on historical averages. However, instead of putting 40% of Macdonald’s portfolio in bonds, GenSpring used Multi-Strategy Hedge Funds for most of the bond risk portion of the portfolio. Though GenSpring claimed that these investments were bond-like and would be negatively correlated with the equities in the account, evidence at the arbitration hearing established that many of these were Fund of Funds with multiple layers of managers engaged in various strategies, many of which were long-equity based, and all the funds were non-transparent so it was not possible to even know what strategies the funds were pursuing. As a result, between September 2008 and December 2008, Macdonald’s portfolio declined by approximately 24% – more than double the downside protection that was promised. In an arbitration before JAMS, the arbitrator awarded Macdonald $884,887 in damages, $97,991 in pre-award interest and $256,036 in attorneys’ fees. The case was handled by Ed Dovin and Allison Ficken. |
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