Prostitution Sting May Take Down a $3.2 Billion Hedge Fund Firm

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Prostitute with a customer,Canton Ticino,Switzerland
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The arrest last week of hedge fund giant Jim Bisenius in a prostitution sting may be enough to take down one of the country's largest "fund of funds" operators.

Bisenius founded Common Sense Investment Management 23 years ago, guiding it through years of growth. As a "fund of funds" it allocates its investments across various hedge funds. Diversifying across several managed funds within a single investment may hold back returns, but it does so in the spirit of reducing risk.

Assets under management peaked at roughly $5 billion several years ago, but Common Sense is still watching over $3.2 billion in client assets. That still makes it one of the largest fund of funds operators and the largest hedge fund in the state of Oregon.

Then police officers in Oregon decided to place a bogus online ad offering prostitution services, setting up camp in a motel room and arresting nine prospective clients. Bisenius was one of them.

A Bad Time for Bad Decisions

Miscues and mistakes happen. A court will ultimately decide if Bisenius is guilty or not. However, as someone who has positioned himself in the investing world as a family man with strong Evangelical Christian and charitable ties, the blow to his reputation will sting.

It also won't help him that the fund's recent performance had been less than stellar, making it more likely that fence-straddling clients will decide to redeem their stakes.

That's where things get messy.

When a fund gets hit with a wave of redemption requests, it has to sell assets to pay out to those customers. As a fund of funds, Common Sense is in a better position than a fund manager would be -- it doesn't have to unload large blocks of stock in the open market, but rather, must redeem its shares of other funds.

However, the ripple effect will be unavoidable as the managers of the hedge funds that Common Sense is invested have to sell off assets to raise capital.

There are already reports of some notable pension funds cashing out of Common Sense. DealBreaker.com reports that Cincinnati Retirement System trustees voted to take back the roughly $100 million it had invested in the fund. Fresno County's Employees' Retirement Association in California is redeeming its $68 million investment. BuzzFeed has obtained a memo in which institutional consultancy Arnerich Massena advises its clients to pull out of the fund.

If this grows into a wave of redemptions, it may be hard for Common Sense to regain the trust of both the clients in his fund of funds and the managers he was entrusting in allocating the infusions of capital.

Standing By Their Man

For now, Common Sense is standing by Bisenius.

Business Insider received a statement confirming that the financial services provider is sticking with him as its CEO and Chief Investment Officer.

"Bisenius' recent personal transgression bears no reflection on this outstanding team of professionals or the quality of portfolio management at CSIM," Common Sense explains.

That may be so, but in the end, it really may not be up to the company. If redemption requests from clients continue to roll in, it will be hard to continue to manage the firm without scaling back on its operations or disbanding entirely. And if cutting ties with Bisenius is what it takes to save the business, well, that's just common sense, isn't it?

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