Weavering Capital's Downfall: A novel idea - trade with yourself

MARCH 23, 2009

The liquidation of Weavering Capital was recently announced. Weavering is a small but established British hedge fund manager which was established in 1988. The $639 million London based hedge fund has called in PricewaterhouseCoopers to liquidate the fund.

Weavering is likely going to be investigated by the UK's Serious Fraud Office,which is part of the criminal justice system, as well as UK regulators including the Financial Services Authority.

It is rumored that Weavering's downfall was a series of interest-rate swap deals between Weavering in the Cayman Islands and a British Virgin Islands based company which just so happened to be controlled by Weaving's chief executive, Magnus Peterson, the former head of trading for Skandinaviska Enskilda Banken (SEB), a Swedish bank.

PwC said it had been told the BVI company’s assets were $10m of cash and $40m of private equity positions. It is unclear who the directors of the BVI company are, but PwC said on Thursday night that Mr. Peterson had told them he controlled it.

Mr. Peterson, his wife Amanda, James Stewart (a frequent TV commentator) and Chas Dabhia (Chief Operating Officer) were on the board of the UK company. Mr. Peterson’s stepfather and brother were directors of the Cayman fund revealed as the counterparty to the trades. The Mayfair (a UK hedge fund center) based fund’s research director is James Stewart, an economic commentator who has made regular television appearances.

As the Madoff scandal has demonstrated in abundantly clear detail the presence of a significant amount of family members, be they on the board of a hedge fund, or actually working on a daily basis at a hedge fund organization should raise a significant red flag during the due diligence process. This is not to say that the presence of any such family relationship should preclude in and of itself investing in an organization such as Weavering, but it should heighten levels of scrutiny of other things such as independence. A second, often-overlooked issue, during the hedge fund operational due diligence process is thoroughly investigating affiliated and/or related entities as well as their board members. In this case many, investors clearly missed this step.

The primary problem in Weavering's case was that the main counterparty in the interest-rate swap was essentially controlled by itself (despite the legal fiction of different entities in different jurisdictions). It seems that once the firm was hit with a wave a redemption requests all at once, Weavering notified investors that it was "urgently" investigating the position. It should have been a fairly short investigation - since it was looking into itself.

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