Posted on December 1, 2011

Hedge Fund Manager to Cover Millions in Losses Suffered by 92nd Street Y

After pledging to backstop any losses the 92nd Street Y incurs by investing in his funds, billionaire hedge fund manager John Paulson, who also sits on the organization's board, could end up on the hook this year for as much as $4 million, the New York Times reports.

Because Paulson made large bets that the economy would recover more quickly than it has, his firm's largest funds are down between 30 percent and 50 percent so far this year, the Times reports. Still, Paulson, who is estimated to be worth more than $15 billion, shouldn't have difficulty writing a check for millions to the nonprofit.

According to the Times, the Y approached Paulson and other hedge fund managers on its board several years ago with the idea of benefiting from their money management expertise and protecting itself against volatile markets. As a result, Paulson and three other money managers — Scoggin Capital Management CEO Curtis Schenker, Eminence Capital founder Ricky Sandler, and an undisclosed party — agreed to make good any losses the organization suffered by investing in their funds.

While legal, the agreement has raised red flags in the philanthropic and corporate sectors, with some critics arguing that nonprofits that do business with board members leave themselves open to possible conflicts of interest.

Despite such criticism, the Y, which disclosed the agreement in its tax return as a related-party transaction, stands by its decision to hire fund managers who sit on its board. "We're certainly not ashamed of any of this," said 92nd Street Y executive director Sol Adler. "This institution has particularly generous board members, including John and a number of others."