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 Problems at Cerberus Capital Management LP may provide a rare glimpse into the difficulties facing Bart M. Schwartz, the trustee charged with unwinding two of the three hedge funds managed by J. Ezra Merkin, Bernie Madoff's bosom buddy who fed $2.4 billion of his clients' assets into the historic Ponzi scheme. The majority of Merkin's Gabriel and Ariel funds -- about 60% -- were managed by Cerberus Capital in separately managed accounts as of June 2008, according to a lawsuit filed against Merkin by New York State Attorney General Andrew Cuomo. Another 25% or so was invested with Madoff. Separately managed accounts, also known as SMAs, are individual accounts that are overseen separately from the pooled investments and are known for being more transparent than typical hedge funds. However, according to the lawsuit, Merkin did not provide input on how the assets overseen by Cerberus should be managed, so it's not that much of a leap to assume that Stephen A. Feinberg, Cerberus' founder, ran the accounts as he did his hedge fund. Indeed, an anonymous investor quoted in Cuomo's filing said he sought to invest in Cerberus but the fund was closed. Merkin then told him that Gabriel invested "side by side" with Cerberus and that investing in Gabriel was the "next best thing" to investing in Cerberus. Cerberus' main hedge fund lost 24.5% in 2008 and is facing redemptions for 60% of the total assets in the two funds, or $4.77 billion, according to The Wall Street Journal. And what's left in the fund is highly illiquid. Clients looking to redeem their investment in the pooled hedge fund were told in an investor letter, dated Aug. 27 and reviewed by The Deal, that it would take three to four years to unwind the assets. Of course, the holdings could be sold off earlier, but it would be at fire sale prices (and Feinberg just couldn't have that). Spokesmen for Cerberus declined to comment. So does that also mean Merkin investors, which include New York University, Tufts and Bard College, have a long wait to get their payback? If Schwartz, the trustee, doesn't want to sell the assets at an extreme discount, then yes. In the mean time, however, we're pretty sure the formerly illustrious manager's prized belongings could fetch a fair penny on eBay. Schwartz did not return a call seeking comment. - Sara Behunek follow me on Twitter @sarabehunek See Also: Busted auto deals drive off Cerberus investors
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