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Inside investment: Lessons from Madoff

People wanted to believe ponzmeister Madoff because they crave stable, compounding returns. After his spectacular fall from grace, calls to shine a light on the opaque world of hedge funds will be irresistible.


The story of Brewster’s millions has been adapted many times from the original 1902 novel. Perhaps the best known is the film version starring Richard Pryor and John Candy. The story is a simple one: in order to inherit $300 million Pryor must first lose $30 million in 30 days. If only he had known about Bernie Madoff, the King Midas in reverse of New York’s Upper East Side. $30 million would have been a mere bagatelle to Bernie, who seems to have burnt his way through a staggering $65 billion.

At first blush this tawdry tale of fraud and malfeasance tells us nothing about the mainstream world of asset management. However, Madoff’s promise of respectable, though not spectacular, returns with little volatility is just what many investors crave. Anyone who has worked in finance for more than five minutes will have seen a presentation for a fund with a return profile (usually of a model portfolio) that slopes diagonally upward from left to right across a chart in a smooth line with few losing periods or serious drawdowns. Real life impedes when the model goes live.

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