The Blog Of The Securities Industry Professional Association

Hedge Fund Mess Just Beginning To Come Home To Roost

Why Madoff will not be an isolated case

Over a year ago we questioned whether there was sufficient regulation of the Hedge Fund industry (click here to read).  In light of the Madoff Meltdown the important question brokers must be asking themselves now is not IF more regulation is necessary, but should one remove one’s clients’ money as soon as possible from the many managed accounts around the world.  I would say unequivocally the answer is yes to the latter. 

Madoff is not a single rotten apple in the bunch and the lone exception to the rule.  Rather, Madoff is a reflection of lack regulation and quite frankly negligence on the part of many of the various agencies who were entrusted to protect investors.  In August of 2007 Goldman and Bear each reported losses in proprietary hedge funds to the tune of $10 billion combined.  At the time we questioned why nobody was looking at these companies and more importantly, we were concerned that if the “best and brightest” minds on Wall Street are losing billions, what about all the main street American hedge funds”? 

The simple truth is that these hedge fund managers are desperate right now to retain investors and stop liquidations and redemptions of their funds.  One prominent Hedge fund manager told me last week “I had nearly a billion dollar fund last summer, and now I’m down to 375 million in assets – due to redemptions.”

These numbers are staggering to say the least and as a Financial Advisor you better be on your guard for Enron type of accounting in the next few months. Think about this for a second: The regulators allowed a “ponzi scheme” to operate for over 10 years at Madoff until Madoff  turned himself in and had his children call the authorities.

I’m going to say this again for effect; but hear what I’m saying:

Madoff turned himself in and had his children call the authorities.

In other words, this whole charade could have continued without anyone knowing for several more years.  More chilling is the obvious fact that in all likelihood, many hedge funds are not even being reviewed for the most basic of things like year end reporting, accounting and performance.  This is not to say that all hedge funds are frauds like Madoff, however we truly believe that the environment was right for abuses due to the lack of any basic oversight.  Unless your hedge fund can provide total transparency (which they very rarely do) we would caution brokers about the safety of their funds. 

Sadly, when the proverbial crap hits the fan, these hedge funds will close. Then the trial lawyers and the regulators will turn on the individual advisors and question why THEY didn’t due more due dillie on the fund or its managers. 

We would urge all Financial Advisors to immediately DEMAND complete transparency from any money manger or hedge fund in which they have recommended.  If they refuse to back up their performance numbers, show their holdings and provide complete accounting, its time to consider getting out of dodge quick.  Madoff will not be an isolated case. Remember, MADOFF TURNED HIMSELF IN AFTER 10 YEARS OF UNDETECTED FRAUD!  Quite simply, there has been no accountability nor regulation for so long that its hard to believe that other hedge funds didn’t cook the books and take shortcuts as well.

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