What Prevents Outright Hedge Fund Theft?

[Bestwifeever]

The brother of the French investor who was found dead in his office last week said this in today's paper:

Contrary to what some analysts say now, Bertrand (the brother) said the returns on his investment with Madoff were not too good to be true.

"Over four years my gain was 17 percent, that's not crazy," he said.

So apparently not every Madoff investor received excessive gains that might have triggered suspicions.

from AP Interview: French investor lost his fortune, friends' and relatives' funds in Madoff scam -- chicagotribune.com

 

[free4now]

Madoff's returns were not remarkable for being high, just for being unnaturally consistent year to year despite market conditions. The tendency to do return smoothing is actually extremely common; many publicly traded companies use a variety of barely legal tricks to make their returns look stable year to year, even at the expense of total return.

 

[Nords]

What it means that a lot of people who invested money with Buffett in the early years probably had no way to *know* that he would deliver for them, or even that he'd be honest and diligent with the funds of his clients.
That's the "faith risk" -- the risk is that you are putting your faith in someone who was unproven and didn't have trransparency in his operations so you couldn't really verify what your money was doing like you could in (say) a Vanguard mutual fund. This is before Buffett was Buffett and before he earned the reputation he has today.

Agree.

From Lowenstein's & Schroeder's biographies, when Buffett was in his 20s it sounds like he was quite the evangelical stock promoter. I wonder how many people gave him money just to be able to enjoy the show... or just to make him go away. And I wonder if we'll ever again read about an office like Graham & Tweedy, Browne's 1950s all-star lineup.

 

[Sarah in SC]

People, you are missing the elephant in the room. What made Madoff so unique (in a bad way) was that he was self clearing! The guy had his own broker dealer, settled his own trades, printed his own statements, etc. That is what made this whole affair possible.

Most hedge funds trade through a prime broker and use a third party custodian )who is on the hook) to watch the money, clear the trades, invest the sweep, etc. If I run a hedge fund and my prime broker is JP Morgan, Goldman, Merrill, Pershing, etc they may not be perfect, but they wouldn't allow what has happened with Madoff.

Bingo. Our local small cheese felon, Al Parrish, did exactly the same thing, on a way tinier scale. Although some of his funds were at Schwab, and they are eating it big-time with the lawyers as a result of not requiring back up to his fabricated statements. You gotta have a real custodian and a real auditor or the likelihood for fraud is practically guaranteed.