Investment Advisory Business Will Suffer Because of Madoff

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.

Comments

[WMBANZAI7:]

MADOFF THE WALL STREET FAKIR
(Rudolph the Red Nosed Reindeer)
WilliamBanzai7

You know Vesco and Boesky, and Keating and Milken,
Leeson and Mozer, and Ponzi and Wiggen,
But do you recall, the most famous securities fraudster of all?

Madoff the WALL STREET FAKIR
Had a GIANT PONZI SCHEME,
And if you ever saw it,
You could say it was Wall Street's own worst dream.

All of the other Wall Street fraudsters
Used to laugh and call him names;
They never believed poor Madoff
Made a legitimate Alpha trade,

Then one shady Wall Street trading eve,
Madoff spilt his own beans to the SEC
"Madoff oh your scheme's so bright,
Won't you go to jail tonight?"

Then how the Wall Street fraudsters loved him
As they shouted out with glee,
"Madoff the WALL STREET FAKIR,
You’ll go down in securities fraud infamy."

Q: Whats the difference between Bernie Madoff and the CEO of a bulge bracket Wall Street investment bank?

A: Madoff is not asking for a bailout.

2008 Dec 14 09:38 AM

[Ames Tiedeman:]

It should suffer. And the SEC and the accounting firms should suffer too. How can 50 billion be stolen and none of the agencies know what the hell is happening??

2008 Dec 14 11:15 AM

[Recourse Bob:]

This was an unregistered fund. As best I can tell, there were no independent accounting firms involved.

2008 Dec 14 12:34 PM

[kurt walter:]

Just get educated about investing, open a discount brokerage account and handle your own money. Nobody cares about your money more than you.

2008 Dec 14 06:36 PM

[jepittman:]

Going it alone is not a viable option for a very large number of people nor should it be. There are thousands of honest advisors many working through large institutions such as banks that have extensive oversight. There are also many mutual funds that have operated honestly and successfully for decades. As Professor Rothbort suggests it is a shame they all will be tarred with the stench of this fraud Madoff.

2008 Dec 14 09:41 PM

[Mr Stox:]

Even if there is more transparency and regulation new investment vehicles will evolve and people will still need to perform their own due diligence on hedge funds.

I came across this book recently which was a useful guide for me:

Hedge Fund Operational Due Diligence:Understandin... the Risks by Jason Scharfman (John Wiley & Sons, Inc. 2008)

Amazon: www.amazon.com/Hedge-F...

Jan 05 05:04 PM