Dynamic Hedge Fund May Be Placed Under Liquidator’s Protection

Date: Tuesday, March 31, 2009
Author: Saijel Kishan, Bloomberg

A Cayman Islands court may decide tomorrow to put Dynamic Decisions Capital Management Ltd.’s main hedge fund under the protection of an outside firm after investors accused the manager of “gross mismanagement and misfeasance,” according to people familiar with the case.

The Grand Court of the Cayman Islands is set to consider a petition for a provisional liquidator to safeguard DD Growth Premium Master Fund, said the people, who asked not to be identified because they’re not authorized to discuss the case. According to the filing, London-based Dynamic Decisions founder Alberto Micalizzi said on a March 13 conference call that the fund had “substantial” losses last year and that assets may have fallen to as low as $20 million, excluding illiquid investments, from $550 million at the end of 2008.

The March 23 petition was submitted by Zolfo Cooper, a restructuring firm appointed this month to oversee two so-called feeder funds set up to invest in the Cayman-incorporated master fund. Those funds were put under Zolfo Cooper’s control at the request of investors Strathmore Capital LLP, based in London, and Cadogan Management LLC of New York.

“There has been gross mismanagement and misfeasance,” the investors said in petitions filed with the court.

Dynamic Decisions suspended investor withdrawals and Micalizzi resigned from the board of the master fund to avoid conflicts of interests, according to a Feb. 27 letter to clients of one of the feeder funds, which are separate pools that channel money into the master fund.

PNC Is Administrator

Humphrey Polanen, the director who signed the letter, didn’t respond to e-mails and telephone messages seeking comment. Micalizzi and Marta Renzetti, Dynamic Decisions’ chief finance officer, and officials from Strathmore Capital and Cadogan Management didn’t return telephone messages.

Dynamic Decisions’ administrator, whose job it is to check valuations, is PNC Global Investment Servicing, a unit of Pittsburgh-based PNC Financial Services Group Inc.

PNC was also the administrator for Weavering Capital, a London-based hedge fund firm that was placed into administration earlier this month and is liquidating its largest fund after discovering the counterparty for its biggest position was controlled by the fund’s manager.

A PNC spokesman declined to comment, as did a spokesman for Zolfo Cooper, which has offices in the Grand Cayman.

In the Cayman Islands, which are British territories, investors can seek a provisional liquidator to protect a fund’s assets, according to the U.K. government’s Insolvency Service. Once appointed, the provisional liquidator investigates the business to discover, protect and recover assets and produces a report to the court, which then decides whether to liquidate.

Switch to Bonds

While Strathmore and Cadogan won petitions for provisional liquidators for the secondary funds, Dynamic Decisions’ investment manager opposed the request on the master fund, according to the people familiar with the case. The Cayman court scheduled an April 1 hearing to reconsider that petition.

Micalizzi, 40, said in a Feb. 20 letter to investors that the firm had cut its equity and options holdings in mid-December and invested in asset-backed bonds. Settlement of those purchases was delayed until February because of “credit market conditions,” according to the letter.

Directors said in the Feb. 27 letter to investors that they hired independent advisers to review holdings of the master fund.

“The board had little information concerning the investment in bonds, and were not even sure if the bonds were genuine,” according to the investors’ petitions. The main fund holds illiquid, commodity-linked bonds that were organized and executed by Micalizzi, according to the petitions.

Conflicting Information

Micalizzi’s firm says in marketing documents that its strategy is to invest mainly in the shares of large U.S. and European companies. According to the petitions for the DD Growth Premium and DD Growth Premium 2X funds, 55 percent of assets were held in commodity-linked bonds at the end of 2008.

Dynamic Decisions also provided conflicting information and failed to give five days’ notice to investors about the termination last year of its prime broker relationship with Morgan Stanley, as well as the change in its auditor to Deloitte & Touche LLP from PricewaterhouseCoopers LLP, according to the petitions.

Dynamic Decisions also gave inconsistent and late information to investors about the amount of assets it managed. The firm said in a January investor letter that the DD Growth Premium 2X Fund, which borrows money to help boost profits, returned 16.2 percent last year while the DD Growth Premium Fund gained 9.1 percent.

Former Professor

The investors also made unsuccessful attempts to find Micalizzi, according to the petitions. The U.K.’s markets regulator, Financial Services Authority, has been notified of the case, according to the petitions.

Dynamic Decisions was started in 2005 by Micalizzi, a former professor of finance at Bocconi University in Milan, according to the firm’s marketing documents. He previously ran a research firm called Real Options Group, which had offices in France and the U.S. He received a doctorate in finance from the U.K.’s Imperial College London.

Last year, about 1,471 hedge funds closed, or 15 percent of the global industry, according to Hedge Fund Research Inc. Many were forced to shut after the funds lost an average of 19 percent and as investors sought to withdraw their money.

Liquidations to Rise

“We’ll see a greater number of liquidations in the coming months,” said Colin MacKay, a partner at Jersey-based Ogier Group LP, whose clients include hedge funds. “It’s just a continuation of the suspended-redemptions process. While some managers were able to work through their positions and return capital, others have run into more significant realization problems than they expected.”

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net