The Bernard Madoff fraud arrest is going to take even more investor confidence out of the market. I was speaking to a colleague about the hedge fund industry after I returned from the IMN Super Bowl of Indexing Conference. In my opinion I thought that the hedge fund industry’s best days were in the past and that the beneficiaries would be mutual funds, ETFs and separately managed accounts. The secrecy and leverage which is a characteristic of the hedge fund industry is simply going to have to be regulated or legislated away. The fund of fund concept is no longer economically feasible as well as it has all of those problems but to a second order.
As to Madoff, one has to wonder – where were the firm’s independent accountants and brokers? Did they just sit idly by? One thing we know about fraud is that it usually takes more than one person to keep the scheme perpetuated. I would expect more arrests to be forthcoming.
We are going to move toward a transparent and regulated environment. My business is set up in just that way. I can’t touch client funds. Period. All that LakeView Asset Management, LLC can do is buy and sell securities. Our brokers independently report client account information to our clients. Clients can also get real time account information online.
While it will take some time (perhaps years) for the cash and money parked in money market funds and Treasuries to be re-circulated back into the market, there is no doubt that it will flow toward transparent and registered investment advisor structures. Unfortunately for now, the honest hard working investment advisor is going to suffer because of the acts of a Bernard Madoff.