What Prevents Outright Hedge Fund Theft?

[Culture]

Thinking about this Madoff hedge fund debacle, I was wonder what prevents outright theft of hedge fund assets?

If oversight is as lax as indicated, what would prevent me from investing $20B in Beaver cheese futures with my buddy Bill in Russian, "losing" everything, closing the hedge fund and retiring to Grand Cayman or similar with my share of the Beaver cheese loot?

Given the general atmosphere of greed on Wall street, i would be shocked if this does not occur on a regular basis, perhaps on a much smaller scale. Perhaps oversight is more strict that I am lead to believe? Does anyone here actually know enough about how these things work to know if this is an issue?

This reminds me of a discussion I have with an insurance adjuster after a fire. He mentioned that stupidity is insurable and not illegal, so the best way to commit arson is to spill axle grease on the garage floor, mop it up with a bucket of gasoline, and admit that is what happened when the building burns down.

Even if the SEC though I committed fraud when investing in Beaver cheese futures, they could never prove it, I would just claim a momentary lapse in judgment. Am I wrong?

Perhaps Madoff stole all the money, then had his sons turn him in to give them cover. He is so old he will probably never go to jail, or if he does it will be for a few months. If this did happen, could you ever be caught?

Am I paranoid?

 

[Dennis]

I don't think so.. Those Rich people give these Hedge funds their Money to basically" Do as they wish" with it.. and only IF and AFTER they caught with their hand(s) in teh cookie jar that You might gets some of it back thru Insurance or other sources..They are a closed Door Business that the SEC doesn't even have supenea powers to gain entry too..Like a Private Investment Club..

Just send away for their "prospectous" and read a few of them ...

But as for "ponzi games"? Some do work and have been for Decades.. and just as long as they can keep new $ comming in? No problembo... Just look at our Own Soc. Sec and Medicare system... The Made-off Group did a pretty good job of it , lasting how long? 20-30 yrs? paying people 10% apy? They doubled their money every 7 yrs? and if they took it off the top every 7 yrs? They have far more than double to tripples their Cost Basis $ back by now.. and who cares about those on the bottom..

Just like suckers buying and chasing afterHhigh Rtn Funds & Stocks , getting to the party late..and get stuck playing Muscial Chairs , without a Chair...

We need them..why? For every Seller is a Buyer...
Cravuous Emptor is it?

Hodges Allocations Fund is a hot One comming up! Buying now and expecting another 03' Repeat in the Doubles and Tripple Rtns.. There is just too many Middle and Upper income class people in our country with alot of Pent up $ sitting on the sidelines and like Marketing..go after the Tweens to 40 yr olds.. forget about the Seniors..The ave 30 yr old makes 2x as much as a Senior does today..and wants to spend it..

 

[ziggy29]

In theory, prison. In reality, not enough.

 

[deepc]

Rene-Thierry Magon de la Villehuchet paid himself a stiff price for his lack of due diligence; wonder if Madoff is losing any sleep?

 

[brewer12345]

A few things serve as a deterrent to outright theft:

- First and foremost, if you build a successful, expanding fund charging the traditional "1 and 20" (1% of assets and 20% of profits, every single year), there is a lot more money in it than just stealingthe kitty.

- Second, you could be sued and/or criminally prosecuted. Since an awful lot of the people who run hedge funds are very wealthy, they have lots of assets that can be attached.

- Third, not everyone who invests in hedge funds is a wealthy dowager or idiot charity, if you get my drift. Some of the investors would be inclined to pursue, um, extra-legal forms of redress.

- Fourth, I know this may be hard to credit, but many of us in the investment business do have business ethics and hold ourselves to a high moral standard.

But anyone investing in these things has willingly cast aside decades of securities law protections, so caveat emptor...

 

[REWahoo]

A few things serve as a deterrent to outright theft:

- First and foremost, if you build a successful, expanding fund charging the traditional "1 and 20" (1% of assets and 20% of profits, every single year), ...

...you've already been granted a license to steal. Why on earth would you do anything to screw it up?

 

[kumquat]

- Third, not everyone who invests in hedge funds is a wealthy dowager or idiot charity, if you get my drift. Some of the investors would be inclined to pursue, um, extra-legal forms of redress.

Uncle Gino's gonna offem?

 

[brewer12345]

Uncle Gino's gonna offem?

Something like that. There are mich nastier people out there than Uncle Gino, or so I am lead to believe.

 

[heyyou]

When you steal large sums from successful businessmen from Asian, Middle Eastern, and Latin American countries, I suspect your family is in more danger than most average Americans.

 

[Sarah in SC]

From the investor perspective, actual real, honest to god audits by a reputable auditor would prevent some of this from happening. It is absolutely amazing that people will accept statements prepared by the hedge fund instead of a legit outside auditor.

 

[ats5g]

Fourth, I know this may be hard to credit, but many of us in the investment business do have business ethics and hold ourselves to a high moral standard.

Well, good luck with that. I only know of one person in the entire investment community that actually has a verifiable heart - John C. Bogle [heart transplant in 1990's].

Face it, for profit entities like hedge funds, brokers, and mutual funds are only in business to do one thing - make money for the owners, not for the investors. Certainly nothing wrong with that, it's capitalism - but as an investor, I'd choose not to play with ya'll.

- Alec

 

[Salaryman]

It's really tough to ferret out fraudsters like bernie M, Mark Dreier or New Era Philantrophy for the regular joe investors like us.
Like the recent credit crisis, where people just stopped trusting the guy on the other side of phone this current situation will have severe and long lasting effects. There is currently a rush to redeem assets from pooled investment funds and the fund of funds, and the regulators will finally need to wake up and take responsibility.
bernie has become the unwitting poster child for the mutual fund industry.

 

[DblDoc]

It's really tough to ferret out fraudsters like bernie M, Mark Dreier or New Era Philantrophy for the regular joe investors like us.
Like the recent credit crisis, where people just stopped trusting the guy on the other side of phone this current situation will have severe and long lasting effects. There is currently a rush to redeem assets from pooled investment funds and the fund of funds, and the regulators will finally need to wake up and take responsibility.
bernie has become the unwitting poster child for the mutual fund industry.

I think you meant Hedge Fund Industry. Mutual funds are already regulated.

DD

 

[chinaco]

It's really tough to ferret out fraudsters like bernie M, Mark Dreier or New Era Philantrophy for the regular joe investors like us.
Like the recent credit crisis, where people just stopped trusting the guy on the other side of phone this current situation will have severe and long lasting effects. There is currently a rush to redeem assets from pooled investment funds and the fund of funds, and the regulators will finally need to wake up and take responsibility.
bernie has become the unwitting poster child for the mutual fund industry.

Yup... often the small guy is the Mark.

In our society, the criminal element is relatively small. But it is large enough to warrant the need for law enforcement and the justice system. If law enforcement is not on the job... the criminals get really busy.

I the white collar world, business tilts the game in their favor legally (through lobbying efforts) and exploit in that way. There is always some percentage of averice grifters that ruin it for all of them.

Hopefully the congress and administration take advantage of this opportunity to pass new fin reg laws while the powerful financial service industry is under scrutiny... otherwise, it will be business as usual.

Any politician taking contributions from banks and insurance companies will be painted with the (You were paid with tax payer bailout money) brush!

 

[Salaryman]

I think you meant Hedge Fund Industry. Mutual funds are already regulated.

DD

I meant the mutfd industry. Because of bernie, investors will sour on the unregulated investments/hedge funds and will favor the more tightly regulated mutfd industry because of the perceived trust factor.

Hedge funds needed this like they need another hole in the head. Many have restricted redemptions or closed funds/shops already, their industry as a whole is under pressure as is the whole investment industry.

 

[Ed_The_Gypsy]

ref to OP: Nothing I can see.

Considering all of the losses to the public and the excesses of so many CEOs, who will probably never be held accountable, I wonder if someone is really considering "extra-legal forms of redress"?

 

[barbarus]

When I first heard Bernie was under 24-hr/day guard, I assumed they were trying to prevent him from fleeing, but the more the facts of the situation emerged, the more I began to believe it was to prevent Option #3 and insure a live defendant.

Leaving out the obvious organized criminal elements Madoff has to fear, there are any number of politicians who are at risk if Bernie spills the beans.

Who carries out political assassination for the USA?

Military? FBI? CIA? Federal marshals? State police?


Another aspect of the overall situation is the statistical probability of other "Bernies" as yet unrevealed. Mr. Madoff's technique must be, if not wide-spread, at least mildly common in the business world. Look how obligingly the SEC colluded in this case alone. It will be very interesting when other, unrelated swindles start popping like cockroaches out of the finely carved, richly appointed, boardroom woodwork.

 

[brewer12345]

Well, good luck with that. I only know of one person in the entire investment community that actually has a verifiable heart - John C. Bogle [heart transplant in 1990's].

Face it, for profit entities like hedge funds, brokers, and mutual funds are only in business to do one thing - make money for the owners, not for the investors. Certainly nothing wrong with that, it's capitalism - but as an investor, I'd choose not to play with ya'll.

- Alec

We are not all annuity salesmen, whatever you may choose to believe. But I see I have yet another member of the ignore list club...

 

[saluki9]

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.

 

[Bestwifeever]

Diversification by the investors, even into several other hedge funds if not totally different asset calsses, might have helped limit the Madoff investors' losses. But no one is required to diversify.

 

[Nords]

An attempt to avoid all the world's Bernie Madoffs would have also passed over that cocky, uncommunicative young whippersnapper Buffett:
Lessons From Madoff: You Would Have Missed Buffett Too - Seeking Alpha

 

[ziggy29]

An attempt to avoid all the world's Bernie Madoffs would have also passed over that cocky, uncommunicative young whippersnapper Buffett:
Lessons From Madoff: You Would Have Missed Buffett Too - Seeking Alpha

From the article:

Of course, I would have missed out on becoming wealthy alongside Buffett – successful Ponzi scheme or not. It seems you are damned if you do and damned if you don’t when it comes to picking advisors. You can never tell beforehand. I’m happy to do it myself.

The bottom line is that "getting rich quick" (or moderately quick as Buffett did for his investors) takes a LOT of risk. That why he was able to generate something like 22% returns for the better part of two decades. No "safe" or mainstream investment can provide that without taking a LOT of risk -- in this case, the risk of faith.

Just as some speculative stocks go bad and some become ten-baggers, some of these people (Madoff) are scam artists, some mean well but fail, and some (Buffett) mean well and actually deliver. But it takes a huge leap of faith for an informed investor to have that trust.

 

[saluki9]

But no one is required to diversify.

Actually, most institutional investors ARE required to. Many of them seem to have forgotten that in this case.

 

[Nords]

The bottom line is that "getting rich quick" (or moderately quick as Buffett did for his investors) takes a LOT of risk. That why he was able to generate something like 22% returns for the better part of two decades. No "safe" or mainstream investment can provide that without taking a LOT of risk -- in this case, the risk of faith.

You're going to have to clarify this concept of "faith risk" with Buffett's hare-brained scheme of "buying assets below book value". I think that by the time he was in his 20s he knew what he was able to do, and it wasn't as much risk as it was systematic slogging. What about the years of Graham's students front-running his classroom stock studies? Buffett's disillusionment with brokerages? Remember his cocoa commodity redemptions? GEICO, from his article "The Stock I Like The Best"? The map company selling at a fraction of the value of its investment portfolio? Learning how to value brands & franchises and use insurance float?

I think Buffett worked his assets off to deliver his returns. It also helped that he was willing to do the scut work & rock-flipping for his own equity stake while others favored selling large-cap blue chips at big commissions or 8.5% front loads. Not sure how much effort was apparent with the others, let alone Madoff. It also doesn't seem possible to create the same record today-- despite the efforts of Leucadia, Merkel, & Lampert. Lord knows I'd put some money with "Son of Berkshire Hathaway" if it existed.

I think Buffett enjoyed turkey-shooting economic conditions in the 1950s & '60s that would be next to impossible to find today, outside of Romania/Croatia or Iraq or North Korea. I think today that he is indeed taking larger risks, although I suspect that he passes up a dozen "opportunities" for every reinsurance contract or derivative he sells. Even then, though, I think that people focus too much on the black swans and not enough on the pedestrian dividend-payers & consumer durables.

That Economist article on rumors of Madoff's alleged insider trading makes perfect sense-- no wonder people were willing to hand over their money and keep their questions to themselves.

 

[ziggy29]

You're going to have to clarify this concept of "faith risk" with Buffett's hare-brained scheme of "buying assets below book value". I think that by the time he was in his 20s he knew what he was able to do, and it wasn't as much risk as it was systematic slogging.

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.