A Hedge Fund Soared, Controlled by Women, or So It Claimed

Jane Buchan is a rarity in the big-money boys’ club of hedge funds.

Amid the testosterone-fueled trading floors of Wall Street, Ms. Buchan has not only built a hugely successful hedge fund investment firm but also one that is, on paper, owned and run by women.

But questions have surfaced about whether her firm, Pacific Alternative Asset Management Company, is now — or ever was — controlled by women at all.

It turns out that S. Donald Sussman, a hedge fund mogul who has bankrolled some of the biggest (male) names in the business, has quietly stood behind Paamco for years, pocketing much of its profit. A recent court ruling officially put a chunk of Paamco’s parent company in his hands.

Equally troubling is the suggestion that Paamco, which collects tens of millions of dollars in fees annually to vet hedge funds for pension funds and other clients, disguised aspects of its own business from its customers, partners and federal regulators.

The arrangement with Mr. Sussman “may have been designed to mislead a number of observers, from the tax authorities to the S.E.C. to entities wishing to invest in women-owned businesses,” Judge Richard J. Sullivan of the United States District Court for the Southern District of New York wrote in an August ruling in the case, which centered on a contract dispute between Mr. Sussman and Paamco.

In an e-mailed statement, Paamco said its relationship with Mr. Sussman had not been structured to mislead anyone and that the transaction in question had been properly treated, and approved by the firm’s legal advisers and auditors.

Furthermore, Paamco said it had never taken any “set aside” business or minority mandates.

A lawyer for Mr. Sussman said in an e-mailed statement that Paamco executives “relied on their own counsel and advisers” and that they had built a “world-class fund of funds business to the benefit of their investors.”

But from the start, Paamco trumpeted the fact that it was run by Ms. Buchan, one of only a handful of women who have made a big mark in the mostly male world of hedge funds.

The question raised by the lawsuit was whether Paamco’s status as a company owned by women, albeit with a scant 51 percent majority for many years, gave it an edge over the competition.

Some states like Illinois and Ohio and corporations like Verizon steer a portion of their pension fund business to investment companies owned by women or minorities, which often fall into the category euphemistically referred to in the industry as “emerging managers.”

For investment professionals trying to stand out in a crowded field, the designation can be “a tool for competitive advantage,” said Thurman V. White Jr., the chief executive officer of Progress Investment Management Company, a San Francisco-based firm that invests in emerging managers. “It’s clear they’ve had some benefits from these kind of initiatives,” he said of Paamco.

Verizon Communications, for instance, hired Paamco as part of the Verizon Diversity Managers program, which was established in the late 1990s to attract funds managed by minorities. Ms. Buchan’s firm oversees a small part of the communication company’s $28.6 billion pension fund. In recent state budget and presentation materials, public pension funds in California and Pennsylvania highlighted Paamco’s status as a firm owned by women.

Documents and depositions related to the case involving Mr. Sussman paint a somewhat different picture. The case centered on whether Mr. Sussman had the right to convert a $2 million loan he made to Paamco’s founding partners in 2000 into an equity stake in Paamco’s parent company. In a countersuit, Paamco’s founding partners claimed the interest Mr. Sussman had charged them violated state laws that set maximum rates on loans.