Dynamic Decisions Investors Push Liquidation: The Importance of On-going Operational Monitoring

APRIL 1, 2009

A restructuring firm named Zolfo Cooper has filed a petition seeking the appointment of a provisional liquidator to protect the assets of Dynamic Decisions Capital Management Ltd.'s primary hedge fund, the DD Growth Premium Mast Fund, according to Bloomberg.

The petition was filed in a Cayman Islands Court, which is a UK territory, and under UK law investors can push for a provisional liquidator to be appointed to safeguard assets.

The petition alleges, "gross mismanagement and misfeasance." It seems a number of inconsistencies were present in the Dynamic Decisions organization - including a number of operational due diligence red flags:

1) Lack of board oversight -
Apparently the firm's founder, Alberto Micalizzi (who had written some interesting options research including developing a theory called Growth Premium Analysis) said in a letter to investors he had significantly reduced holdings in equity and options and had invested in bonds. “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.

2) Conflicting marketing materials -
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% of assets were held in commodity-linked bonds at the end of 2008.

3) Auditor change -
The funds changed its auditor to Deloitte & Touché LLP from PricewaterhouseCoopers LLP, according to the petitions.

4) Violation of notice provisions -
Dynamic Decisions failed to give five days’ notice to investors about the termination of its prime broker relationship with Morgan Stanley.

Stability and consistency of information is a key element in the operational due diligence process. Oversight of such matters can expose hedge fund's to an unnecessary amount of operational risk. If a hedge fund is subject to UK law in certain circumstances it may be subject to a vocal investor seeking assistance from the court's when operational risk gets out of hand as it seems to have in this case.

By conducting on-going operational monitoring investors have a better chance of detecting red flags sooner than other investors who do not perform this on-going monitoring - and perhaps being ahead of the queue to get their money back when operational problems or fraud arise.

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