Gar Wood Securities
The failure of two Bear Stearns hedge funds in July of 2007 presaged the near unraveling of the investment banking and alternative investment sectors as the financial crisis unfolded and investors in many other hedge funds began withdrawing their money. By the end of 2008, an estimated 1,500 funds ceased operations, and the tally continued through the first half of 2009.
Prime brokerage was dead center in the alternative investment crisis. The three firms that dominated the market -- Goldman Sachs, Morgan Stanley and Bear Stearns -- commanded roughly two-thirds of the $11 billion market in mid-2008, with large investment banks such as JPMorgan Chase, Deutsche Bank, UBS, Credit Suisse and BNP Paribas competing fiercely for the remaining business.
The collapse of Bear and the subsequent troubles of many other financial institutions that depended on prime brokerage for either solid revenue or as an area of potential growth left surviving funds with less confidence in the larger players in the business.
These developments proved to be an excellent opportunity for Gar Wood Securities, a smaller, Chicago-based independent broker/dealer that was already positioned to compete for increased prime brokerage.
In addition to timing announcements of Gar Wood's expansion into fund administration services and a risk management reporting division that allowed its clients to consolidate positions from multiple prime brokerage, integrating analysis from Risk API, D M Public Relations positioned CEO Bob Jersey as an authoritative source for many aspects of the alternative investment business.
Jersey was featured prominently in The Wall Street Journal in a Sept. 24, 2008 story discussing the $12 billion monthly outflow from U.S. hedge funds and was also able to comment on the likely consolidation of so-called mini primes, the smaller prime brokerage operations that have gained cachet and market share following the Sept. 15, 2008 collapse of Lehman Brothers.
That in turn has positioned other Gar Wood executives as reliable commentators on stock prices during the midst of the October 2008 market collapse and the reconfigured industry standards for "credible" hedge fund assets to secure the business of major prime brokerages.
The elevation of Gar Wood executives' media profiles put the firm in a unique and beneficial position following the Dec. 11, 2008 arrest of Bernard Madoff, whose Ponzi scheme investment scandal roiled an already widely discredited alternative investment industry.
When federal investigations revealed the extent of the fraud at Bernard L. Madoff Investment Securities, hedge fund clients such as Fairfield Greenwich Group, which had invested almost half its $14 billion in assets under management, were caught out and portrayed in the press as with varying degrees of scorn. Media portrayals of the Madoff feeder funds described their operations from careless to possibly collusive.
As an independent, authoritative set of sources with a demonstrated track record of success, Gar Wood management was able to provide reassurance, perspective and advance the firm's own reputation in the midst of the Madoff fallout, which was a disaster for the hedge fund and alternative investment industry.
Jim Zurlo, head of prime brokerage sales at Gar Wood, came across as a reliable inside source of informed probity in follow-up stories spawned by the Madoff crisis. His explanations of why the fraud wasn't detected sooner, particularly the credence given to Madoff's longstanding industry reputation, helped explain the events to a greater extent than investigator accounts.
But Zurlo's commentary on both the need for higher standards among funds of hedge funds and the vital importance of due diligence helped put Gar Wood in the front ranks of firms that represent a post-Madoff standard in the hedge fund industry. The need for thoroughness, caution, and verification of best practices he emphasized, in media interviews, make his own standards and those of Gar Wood's synonymous with a new era of increased transparency for the alternative investment business, and sows the seeds of rebuilding investor trust - a vital component of an industry that has suffered considerable damage to its reputation.