Madoff: One Bad Apple Should Not Deter Investors 21 comments
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I manage a small fund-of-funds and have been receiving numerous calls from my investors asking whether I was exposed to Bernard Madoff (the answer is no). Mr. Madoff is the investment manager who was arrested last week for running a Ponzi scheme that purportedly defrauded investors of up to $50 billion. Amongst his investors were notable high net worth individuals and charities, institutions, “feeder funds” and funds-of-funds. As the Madoff Fraud has greatly shaken the trust of hedge fund and fund-of-funds investors, I wanted to take a moment to address these events.
Although I never met Mr. Madoff nor conducted due diligence on his investment strategy, it seems a number of red flags were apparent and can provide lessons for the future:
- Mr. Madoff generated amazingly and consistently positive returns throughout good markets and bad. When something appears too good to be true, it often is.
- Mr. Madoff provided investors with limited transparency about his complex derivatives strategy. If you can’t understand it, you shouldn’t invest in it.
- Mr. Madoff was paid through trading commissions, rather than the usual method of taking management or incentive fees. Even without deliberate fraud, this fee arrangement is atypical and rife with conflicts of interest.
- Mr. Madoff’s auditor was a little known one-man shop in upstate New York. While not an absolute disqualifier, this certainly should have raised important questions.
My heart goes out to those individuals who had their life savings invested with Mr. Madoff. It is bad enough to have an investment go sour – it happens to the best of us – but entirely worse to be a victim of outright fraud. The calculus for those feeder funds and funds-of-funds that Mr. Madoff duped is somewhat more complicated; they were being paid fees (as my fund is) to conduct due diligence on behalf of their investors. While the funds’ principals are claiming that Mr. Madoff’s scam eluded even their most thorough due diligence, their investors are unlikely to exonerate them for their blunder.
In some ways, the Madoff fraud provides fitting closure to what has been an extraordinarily difficult year for investors. Some may now be inclined to throw in the towel on active money management and limit their equity exposure to passively managed ETFs, such as SPY. I do not believe, however, that the existence of a single Bernard Madoff should deter sophisticated investors from considering properly due diligenced, professional investment managers. There are a lot of good apples out there...if you can find them and avoid the bad ones.
Disclosure: Author holds a long position in SPY
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This was not JUST a Madoff problem; it is clear that the mess we are in is indicative of deep systemic problems.
It is NOT the Madoff revelation that terrifies investors and prompts a charge for the exits! Who can blame folks for refusing to throw their money into a market so systemically flawed and corrupt!
To me the entire 401k and IRA retirement system is flawed and created to perpetuate theft on a grand scale. Retirement funds are there to buy and force prices up.
The methods in place to value securities is also flawed and criminal in many ways. At 4:05pm THATS the the new price. Multiply it across the board. Throw out the fact that selling reduces the bid and ask.
Before the crash most stocks were sold at multiples that mathematically made it impossible to justify. When you buy a house isn't there a second party that says if the house is worth the price ? Nothing like this exists with any power to stop you from engaging in risky stock purchases.
DOW 5000 is much closer to the actual value of our heavily leveraged companies
I think they are all to some degree deceptive when the assert that professional investors (honest ones ) can consistently beat the dice over the long run.
If they cover their fees and equal the index, that seems to be about the best you can hope for but even this is seldom achieved.
Your money should remain in a brokerage house and if you want your funds to be managed by an outside money manager, have him trade your account - don't give him your money directly.
His biggest enemy is the Israeli Musad and the Mafia. But maybe he has the cash to satisfy them. Let me settle our accounts....
Don't think for a second that he hasn't hid money world wide for the last 20 years. Maybe a BILLION in CASH in spider holes and mattresses.
He is going to disappear just like Bin Laden. Add a mustache and a wig...
Stop cheer leading Cramer. You are consistently wrong about the big picture and only help people lose their last dollars.
"Mad Money" = "Madoff Money"
You're right, but I think it goes beyond being 'systemic' to being cultural. Since the Reagan/Thatcher era there has been a tidal wave (sorry, must get up to date - a tsunami) of regulatory capture not just in the financial services industry (e.g., derelict SEC and Fed, London's 'light-touch' - that is, non-existent - regulation) but also in many other industries (e.g., FAA inspectors 'in bed' with carriers they're supposed to be monitoring, UK regulatory watchdogs turning a blind eye to egregious price rises by privatised utilities). I'm really not sure what the solution is. It would clearly be naive to place unbounded trust in the integrity of unsupervised businesses (sorry if that sounds a bit European 'Socialist'), yet governments certainly don't have a good track record of effective and efficient intervention (the 'Austrian' in me re-emerges). I guess it's caveat emptor - but that's not as easy as it sounds for people with limited time and information.
Sex and money: these are all whores. And yes, all hedge funds should be as illegal as trust funds were after the Great Depression wrecked 99% of those illicit money stealing machines.
We are far too quick to accept cultural characteristics of our times simply as the natural order, without acknowledging that this world is exactly the world as we have made it.
On Dec 17 10:55 AM OldLimey wrote:
> Jim Hawthorne: "This was not JUST a Madoff problem; it is clear that
> the mess we are in is indicative of deep systemic problems."
>
> You're right, but I think it goes beyond being 'systemic' to being
> cultural. Since the Reagan/Thatcher era there has been a tidal wave
> (sorry, must get up to date - a tsunami) of regulatory capture not
> just in the financial services industry (e.g., derelict SEC and Fed,
> London's 'light-touch' - that is, non-existent - regulation) but
> also in many other industries (e.g., FAA inspectors 'in bed' with
> carriers they're supposed to be monitoring, UK regulatory watchdogs
> turning a blind eye to egregious price rises by privatised utilities).
> I'm really not sure what the solution is. It would clearly be naive
> to place unbounded trust in the integrity of unsupervised businesses
> (sorry if that sounds a bit European 'Socialist'), yet governments
> certainly don't have a good track record of effective and efficient
> intervention (the 'Austrian' in me re-emerges). I guess it's caveat
> emptor - but that's not as easy as it sounds for people with limited
> time and information.
>
Based on what you've pointed out, I can't understand how any fund manager ever even got to the point of doing a due diligence review with Madoff let alone investing with him. Looking at past success of in the hedge fund industry, there are obviously plenty of sound investments being made, and now is a great time to be making them!!
On Dec 17 09:30 AM prudentinvestor wrote:
> You make it sound like you know for sure that Madoff was the only
> one engaging in this practice. How do you know? As Rummy famously
> put it: "Absence of evidence is not evidence of absence".