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Madoff: Lessons from hedge fund fraud

Madoff should mark the end of feeder funds.

If $80 billion in redemptions in two months at the end of last year were not enough, hedge funds now have to deal with the reputational damage inflicted by Bernie Madoff’s spectacular hedge fund fraud. While most managers will hang their heads and lament that Madoff’s confession could not have come at a worse time, it is legitimate to argue the exact opposite.

The future of hedge funds is under scrutiny and the more examples of what can go wrong and how it can be avoided, the better the decisions on that future will be.

To regulate or not to regulate has been the question for some time but what Madoff’s case seems to prove is that regulation would not make a jot of difference. The SEC had looked into allegations that Madoff’s fund was not all it was said to be, and could see nothing wrong. If regulators cannot help, there is little point in regulation. Or, at least, this is a clear indicator that those working at the SEC should have a background in due diligence.

And who did know that Madoff’s fund was iffy? Those that conducted appropriate due diligence.

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