High-Risk Fund Trader Burns 1,400 Colleges : Investment: Schools suffer reduced earnings on their endowment money entrusted to nonprofit pool.
More than 1,400 colleges and universities will suffer reduced investment returns because of a trader’s estimated $128 million in unauthorized losses over the last three years.
The Common Fund, a nonprofit fund that oversees a $20-billion endowment pool for schools of all sizes, alleged in a letter to its members Monday that the 39-year-old senior trader “took elaborate steps” to hide risky transactions from the fund and his employer, money-management firm First Capital Strategists Inc. of York, Pa.
The fund’s president, David K. Storrs, said in the letter that trader Kent Ahrens failed to hedge stock market bets against unforeseen risks beginning in 1992.
School officials said Monday that the impact on their finances would be minimal because the principal on their investments won’t be diminished. Instead, returns will be lower than expected.
But the size of the loss left the academic and investment communities wondering how one individual could conceal millions of dollars in losses from his employer and the fund for so long.
The University of Michigan will make $1.5 million less than expected in investment returns this year. Norman Herbert, the university’s treasurer and investment officer, described his reaction on learning about the losses as “disappointment, shock that one individual could do something like this.”
Of the $745 million in University of Michigan money that is managed by the Common Fund, $114 million is in one of the money-losing funds. The money, earmarked for building projects at the Ann Arbor-based school, will earn 6.9% return this year instead of the originally projected 8.2%, Herbert said.
“It’s just a lower return. To that extent, it does not affect the operating budget,” said Herbert, who is also a trustee of the Common Fund.
Hope College, a Holland, Mich.-based undergraduate school with about 2,800 students, said it will earn $100,000 less than expected after investing $9 million in two First Capital funds. Its total endowment fund is about $57 million.
“It won’t have an immediate operational impact, but in the long-term it will because the value of our endowment will be less,” school spokesman Tom Renner said.
The Common Fund, based in Westport, Conn., said it discovered the losses last week when Ahrens admitted the scheme following an inquiry launched by the fund. The inquiry was prompted in part by last year’s $1-billion collapse of Barings, also blamed on a single trader.
The Common Fund said the losses apparently started three years ago when Ahrens lost a small amount of money on an unauthorized trade. Instead of reporting it, he took steps “to trade his way out” of the situation. But the losses mounted as a result, the Common Fund said in the letter.
The fund said it was repeatedly reassured that First Capital was complying with its investment guidelines, which require transactions to be fully hedged against risk. But Common Fund said it did not examine the trader’s transactions in detail because that was not its role.
The Securities and Exchange Commission is investigating the loss for fraud violations, according to published reports Monday. Colleen Mahoney, SEC deputy director of enforcement, declined to comment on the reports.
But auditors from the Commodities Futures Trading Commission working with the SEC were at First Capital’s Pennsylvania offices Monday, a source at the CFTC said.
Legal experts said the problem apparently arose because of inadequate supervision and controls at First Capital.
“It’s incumbent upon the management to make sure they know what the traders are doing and what the exposure to the market is,” said John Stoppelman, a Washington lawyer who is a former chairman of the SEC task force on investigation rules.
