Panama Papers reveal yet another secretive aspect of hedge funds

HIGHLIGHTS

Bernard Madoff’s feeder funds show up in the Panama Papers

2 other managers who used offshores to hide assets find themselves in jail

One fund manager says there is room for more transparency

The kinds of secret offshore companies that have hidden political corruption and tax evasion around the world are often used by Wall Street’s biggest money makers — the $2 trillion hedge fund industry.

The now-famous Panama Papers leak offers rare insight into the workings of this exclusive investment club.

Hedge funds accept individual investors with net worths of $1 million or more and worker pension funds with $5 million or more. They and their investors often locate in tax havens such as the Cayman Islands or the British Virgin Islands.

The names found in the leaked files from the Panamanian law firm Mossack Fonseca include two now-imprisoned hedge fund managers, a major “feeder fund” that was part of the largest-ever Ponzi scheme run by Bernard Madoff and several anonymous investors whose offshore companies became tangled in the Madoff web.

In the aftermath of the Madoff scandal and the 2008 U.S. financial crisis, hedge funds have been forced to register with regulators, and they face severe penalties under a new “bad actor rule” if they take money from criminals or proceeds of corruption.“Most financial institutions do require considerable information on investors” today, said Robert Van Grover, an attorney with Seward & Kissel LLP in New York who thought the abuses found in the Panama Papers “would be very difficult in the United States” now.

But the hedge fund managers and their investors identified in the leaked documents by McClatchy and partners underscore what has been a weakness in oversight: They often used secret offshore companies, which hid investor fraud and potentially unsavory investors from U.S. regulators.

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