Big names blow millions on Basis Capital

A string of Australia’s best known business leaders and investors are facing big losses in Australia’s worst hedge fund collapse with Basis Capital’s High Yield Fund. Former Fairfax chief executive Fred Hilmer, venture capital star Roger Allen and the Myer family are among the big names that have emerged with massive losses following an investigation by Eureka Report.

As investors digest the reality of a combined $350 million loss, Fred Hilmer - now vice chancellor of the University of New South Wales - has confirmed he invested $341,000 from his super into the hedge fund. “My money is managed for me. This is just one investment made in a diversified investment strategy, though I’m clearly not happy with it,” he says.

Roger Allen, the doyen of Australia's venture capital sector and co-founder of Allen & Buckeridge is facing a loss of $101,000. With Basis Capital's High Yield fund now in the hands of Cayman Island-based receivers, Allen says “Obviously no one’s happy about losing money but there are risks in all sorts of investments, especially geared up hedge funds.”

Contrary to reports that the majority of the capital tied up in the collapse was sourced from superannuation funds, local councils and charities - our investigation has revealed a group of 788 retail investors dotted across Australia.

Among the high-profile investors are interests connected with the Myer family, MF Custodians, which is believed to have sunk $808,000 into the fund. Interests connected with retirement village tycoon, Zig Inge, are facing losses of about $152,000. A super fund connected with the media shy Wilson family, which controls listed plumbing supply company Reece Australia are facing losses of $307,000.

Former chief executive of Lend Lease and Westpac board member Stuart Hornery is believed to have invested $244,000 in the risky venture. Despite the significant sum of money involved, Hornery was sanguine about the loss he is facing: “You win some, you lose some” Hornery told Eureka Report.

The highly geared Basis Capital High Yield Fund invested in collateralised debt obligations (CDOs), the values of which plummeted in the wake of the subprime mortgage crisis. As margin calls were made, assets were sold off into a falling market and the fund was placed into receivership. Units in what remains of the fund have been valued as worth anywhere between 1¢ and 20¢ in the dollar.

But some of those caught up in the scandal are not going away quietly. Max Newnham, a financial commentator and chartered accountant, personally invested in the collapsed hedge fund and put his clients into it too. “The biggest issue here is the lack of understanding. There was a lack of understanding on the part of the investor, the advisor, by the rating agencies and even by the fund manager itself.” says Newnham.

So who's to blame? Investors are fighting individually and collectively to get some answers. Already two initiatives are under way

The first is from the 'Basis Action Group’, a support group set up for victims of the collapse. The group is considering taking action against those financial advisors who failed to adequately explain the risks. Investors can find out more about the group at basisactiongroup@gmail.com. Separately, fresh legal action is being planned by financial advisers against research houses that signed off on the ill-starred fund.

Mid tier accountancy and advisory firm Pitcher Partners is believed to have advised as many as 47 clients to invest a total of $4.7 million into the fund. Hayes Sterling, an Adelaide-based financial planning group, is believed to have advised 43 clients to invest $3.3 million. While the Sydney based group Aspect Partners is believed to have advised 19 clients to invest $1.4 million.

As the investors target the advisors, the advisors are pointing the finger squarely at the ratings houses who produced research on the fund. Peter Johnston is the executive director of the Association of Independent Financial Planners, a group planning legal action. “We’re taking action because we were really unhappy with the research ... we are also sick and tired of planners getting the blame for everything.”

Research houses involved in analysing Basis Capital’s High Yield fund include Morningstar, Lonsec, Van Eyk and Standard & Poor’s. Lonsec had a “high conviction in the manager’s capability” and expected the fund to “achieve its investment objective”. At Standard & Poor’s Basis Capital had been voted one of the “hedge fund managers of the year” for 2007.

Research house Morningstar took until October 8 to place an “avoid” rating on the fund. We contacted the research houses that are reported to be the focus of the upcoming action. None were prepared to comment.

A spokesperson for ASIC says: “Research houses need to be careful with their ratings and ensure that people who rely on them will understand what they mean and the basis on which they have been made. An advisor should look at the reason for the rating and not rely on the rating itself. The onus is on the advisor to look beyond the rating and back up their decisions with research.”

For now, it appears that investors are on their own. As the advisors and research houses begin a merry-go-round of finger pointing, the fund itself has closed ranks. A spokesman for Basis Capital refused to be quoted on anything, saying only: “Basis has been upfront with the ratings agencies from day one. We have always had an open door policy with these organisations”.

How can investors make sure they don’t get caught out in the future? Roger Allen - an exceptional well-qualified investor who still managed to get caught in the Basis Capital debacle, says. “Diversification can help you spread your risk across a number of different sectors. This fund was one of perhaps a hundred different investments. It was advised to us. It’s a totally passive investment from one of our financial advisors. That’s why you have a big portfolio of investments.”

Says Allen: “It has really brought home to me the value of active management in a portfolio. If I’ve got a company underperforming in my portfolio then I can get in and do something about it.”

Fred Hilmer adds. “My exposure was less than 2% of my total portfolio, a relatively small amount. Other things that they (Hilmer’s investment adviser, Investec) have done were winners. The total of the fund looks okay”.

Hilmer believes you should also consider your risk profile in the context of your investments. “The basic law of finance is that there is a correlation between risk and return,” Hilmer says. “You can put together a portfolio that might make double the rate of return of a bond fund at the time but at the same time you may lose it. My discussion with my advisor is more along those lines. If I could pick investments then I wouldn’t use an advisor.”

In fact, Hilmer may have been better off without one. One of the key themes to emerge over and over again was a fundamental failure to understand the nature of the underlying assets in the fund.

What’s more, little is being done to ensure that it doesn’t happen again. The research houses remain protected by the pages of disclaimers that are attached to every note, the advisors are protected by the dealer groups’ highly paid legal counsels, while bodies like ASIC and IFSA are quick with a sound bite but ultimately leave the investor unprotected.

Says Max Newnham: “I’m regarding the investment as a bit of a loss. You are always going to suffer some losses in your investment history. If you have taken a diversified approach to investing you are not going to get that knockout punch, but this is still a decent blow. Until we can fully understand these activities we will no longer accept the platitudes of the fund manager.”