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When you click on the SIPC website, you will see a pop-up screen for "Madoff claims." I've been reading stories about the hard-luck investors and charities that invested with Madoff all over the place. In fact, Saturday's WSJ could almost be called propaganda designed to make readers feel sympathy for Madoff investors (thank God for the James Grant article, which salvaged the issue). Don't fall for it. These investors knew what they were getting themselves into when they invested with a hedge fund.

First, only sophisticated investors can invest with hedge funds. A hedge fund is a private investment fund open to a limited range of investors. Such a fund is less regulated and allowed to undertake a wider range of activities than other investment funds. Basically, the rich have created a separate avenue of investment designed to make them even more rich--or, in some cases, less rich. Hedge funds come with unique risks--and everyone knew that going in. That's partly why few people asked questions--a hedge fund is designed to be less regulated, so there's more allowances made for secrecy.

Second, you should always be wary when the government or the media says Wall Street should have more protection or attention than Main Street. Investors like you and me are limited to KKR Financial (KFN) or Blackstone (NYSE:BX) if we want a piece of the hedge fund mystique. How are those stocks doing? Well, KFN is around 57 cents per share. BX is about $6/share, with a 52-week high of $23.87/share. In short, Main Street investors didn't do much better than Madoff's investors--and the SIPC isn't going to help us. Why should Madoff's investors--who already had access to a special fund--get special help or special sympathy? I don't see sob stories featuring Blackstone or KKR investors.

I am deeply concerned that taxpayer monies may be used to reimburse Bernie's rich investors more than the usual $500,000 SIPC coverage. Taxpayers are already paying Bernie's investors half a million dollars each. I fear that Congress will increase the cap of SIPC insurance, purportedly as a populist move (I can already hear the words, "For our protection")--and then make the increased limits retroactive. If that happens, taxpayers will be on the hook for even more money, all to be paid to sophisticated, rich investors.

Don't be scammed. Madoff's investors were doing fine before Madoff, and they are still better off than 99% of the American population today. If they convince you otherwise, perhaps they really do deserve to be called sophisticated investors--after all, if Madoff's rich investors are smart enough to get reimbursed for 100% of their losses when they knowingly invest in a less regulated fund, the American taxpayer is indeed unsophisticated.

Source: Don't Be Scammed by Madoff Investor Sob Stories