Hedge Fund Hotel Heartbreak: UBS Settles for $100K

November 22nd, 2010

The “Hedge Fund Hotel” wasn’t a four-star luxury palace where fund managers went to be pampered and spoiled, though we are sure such places do exist. Rather, it’s the term used for an arrangement conferring office space, technology and other services to hedge funds by a certain prime broker.  Now, Massachusetts has fined UBS Securities LLC $100,000 to settle a complaint the prime broker didn’t fully disclose its arrangements with hedge fund advisers.

UBS Securities, a unit of UBS AG. settled the allegations without admitting or denying wrongdoing, a spokesman for Massachusetts Secretary of the Commonwealth William F. Galvin said Thursday. UBS spokeswoman Allison Chin-Leong said, “we’re pleased to have resolved the matter.”

The case dates back to a 2002 inquiry into ABN Amro Securities LLC, a prime broker that offered an arrangement known as a “hedge-fund hotel.” UBS acquired ABN Amro’s prime brokerage business in 2003 for $250 million. Massachusetts’ Galvin said UBS didn’t enforce a requirement that its hedge-fund hotel clients disclose their arrangements with the bank to investors.

Prime brokers profit off spreads they charge hedge funds to finance trades as well as fees for clearing and other services. In a hedge-fund hotel, a prime broker provides start-up hedge funds equipment and other services to help incubate their business. But the arrangement can create conflicts unknown to the endowments, pensions, or other investors in the funds.

In a 2007 administrative complaint against UBS, Massachusetts’ Galvin accused the firm’s prime brokerage division of maintaining a quid pro quo with hedge-fund advisers, requiring them to meet benchmarks of profitability for UBS or ensure they don’t use other prime brokers.

In one instance, the 2007 complaint alleged, a hedge-fund adviser who refused to alter his trading strategy to meet UBS’ demand for greater revenue was no longer welcomed in UBS’ office space.

Galvin didn’t allege any investors were damaged by the practice.

The hedge-fund advisers are supposed to disclose their arrangements with prime brokers to investors, but Galvin contends UBS failed to enforce these disclosures even though it had a policy to do so. In settling the allegations, UBS agreed to retain an independent consultant to review its disclosure policy and monitor it for three years.


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