You can't regulate against gullibility
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You can't regulate against gullibility

The senior executive at a French bank leans forward urgently and semi-conspiratorially. After a wide-ranging discussion on the familiar list of hedge fund risks – excessive leverage, style drift, survivor bias in performance figures – he finally has something significant to relate.

There is a marketing executive for a large hedge fund now doing the rounds of the the private banks' very wealthiest families in France. His pitch is an unusual one. He is explaining to these super rich how the founder of his hedge fund has discovered a secret formula for beating the financial markets.

The banker arches his eyebrows.

What does he make of this fund? It is, he says, a Ponzi scheme. It's reported annual returns rise at a straight 45 degree angle across the graph. But if you look at the strategy it is supposed to be pursuing, there is no rational explanation for how it could have produced such returns.

Has he mentioned his suspicions to the regulators? Yes he has, but nothing seems to have been done. And this is not some small, fly-by-night affair. The fund has close to $1 billion under management and has been included in some of the funds of hedge funds.

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