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Lessons to be learnt from the Madoff fraud

The huge fraud underlines the crucial role of hedge fund administrators and independent prime brokers. An SEC that’s more au fait with hedge funds would also help. Neil Wilson reports.

In association with Hedge Fund Intelligence

The brouhaha surrounding the huge fraud perpetrated by Bernie Madoff could hardly have come at a worse time for hedge funds.

Performance in general was deeply disappointing in 2008. Even if the industry did on average beat the returns in most asset classes, a significant majority of hedge funds were negative on the year. And with an increasing number imposing gate provisions or suspending redemptions, all too many managers have also got themselves into highly fractious relationships with their investors or their prime brokers, or both.

With a lot of investors already planning, for various reasons, to cut back allocations to hedge funds, this was really not the time to discover that one of the longest-running managers of money in the business was in fact operating nothing more than a Ponzi scheme.

Two key questions will dominate the debate about Madoff for the foreseeable future. How did he do it? And how did get away with it – how did the extensive due diligence supposedly conducted on behalf of investors fail to discover that the emperor wasn’t wearing any clothes? There will be a lot more investigation and research before final conclusions are reached on those questions.

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