The Hedge Fund Thread

[bbmac]

Made off with $50bn..Robert Peston's take on it

Robert Peston 12 Dec 08, 05:19 PM

I am told that "Madoff" is pronounced "made off" - as in "he made off with the money".

That's the end of the jokes.

The supposed $50bn swindle by Bernard Madoff at his hedge-fund and securities trading business is serious stuff.

It's possible that Mr Madoff's $50bn estimate of how much he's evaporated is an overstatement. But there will be losses for investors in his funds, such as clients of Nicola Horlick's Bramdean.

Perhaps more troubling are the implications for the multi-trillion dollar hedge fund industry in general.

This industry is rapidly contracting, as the likes of Morgan Stanley and Goldman Sachs reduce the credit they provide to funds.

And the collapse of Madoff is likely to to accelerate the disappearance of funds - in that it may persuade many investors to demand their money back from even high qualiity funds and funds of funds.

Investors will note that regulators have taken long, hard looks at Madoff over many years, and failed to detect fraud.

Which will make investors fear - however irrationally - that no hedge fund can be deemed wholly safe.

If investors demand their money back, there would be wholesale dumping of assets by hedge funds.

And that would compound losses for them, as the price of assets would fall - and it would prompt demands by creditors for hedge funds to put up more collateral (margin calls), which would lead to further asset sales.

All of which would mean that the moment when share prices, property prices or any other asset prices find that elusive floor would be deferred yet again. Which matters to anyone saving for a pension and for banks' ability to turn on the credit tap again.

Which is why, as I said, it would be unwise to chuckle at Madoff's mad mess.

 

[bbmac]

Citadel Suspends Withdrawals in Two Hedge Funds After 50% Drop

Citadel Suspends Withdrawals in Two Hedge Funds After 50% Drop


By Saijel Kishan and Katherine Burton, bloomberg.com

Dec. 12 (Bloomberg) -- Citadel Investment Group LLC, the Chicago-based hedge-fund firm run by Kenneth Griffin, halted year- end withdrawals from its two biggest funds after investors sought to take out $1.2 billion, according to a letter sent to clients.

The Kensington and Wellington funds, which together manage about $10 billion, have lost 49.5 percent of their value this year through Dec. 5. Withdrawals may resume as early as March 31, said the letter, signed by Griffin and sent to investors today.

“We have not made this decision lightly,” Griffin wrote. “We recognize how a suspension impacts our investors, especially those with current financial obligations of their own to meet.”

Citadel joins hedge funds including Fortress Investment Group LLC and Tudor Investment Corp. in limiting withdrawals as hedge funds head for their biggest annual losses since at least 1990. Hedge funds have declined 18 percent, on average, this year through Nov. 30, according to Chicago-based Hedge Fund Research Inc.

As of October, 18 percent of hedge-fund assets, or about $300 billion, managed by 5 percent of hedge funds, were subject to some sort of restriction on withdrawals, according to Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA Pte.

Citadel normally allows clients to withdraw up to 1/16th of their assets quarterly. If total withdrawals exceed 3 percent of the fund, investors must pay a fee back into the fund ranging from 5 percent to 9 percent. Redemptions have never before surpassed the limit.

Citadel will also absorb “a substantial portion” of the funds’ expenses this year, the letter said. Citadel clients usually pay these charges, which have traditionally amounted to about 3 percent to 4 percent of assets.

The fund is holding between 25 percent and 30 percent of its assets in cash.

Katie Spring, a spokeswoman for Chicago-based Citadel, declined to comment.

Before 2008, Citadel had posted just one losing year since Griffin started the firm in 1990, dropping 4 percent in 1994. Three Citadel funds, whose returns are tied to the firm’s market- making business, have climbed about 40 percent this year. Those funds manage about $3 billion.

To contact the reporter on this story: Katherine Burton in New York at [email protected]

Last Updated: December 12, 2008 19:14 EST

 

[bbmac]

Inside Wall Street's Madoff Scandal - WSJ.com

The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses. Madoff told senior employees of his firm on Wednesday that “it’s all just one big lie” and that it was “basically, a giant Ponzi scheme,” with estimated investor losses of about $50 billion, according to the U.S. Attorney’s criminal complaint against him. A Ponzi scheme is a swindle where early investors are paid off with money from later investors. The $50 billion allegedly lost to investors would make Madoff’s fund one of the biggest frauds in history. When Enron filed for bankruptcy in 2001, one of the largest at the time, it had $63.4 billion in assets. U.S. prosecutors charged Madoff, 70, with a single count of securities fraud. They said he faces up to 20 years in prison and a fine of up to $5 million. “Madoff stated that the business was insolvent, and that it had been for years,” Lev Dassin, acting United States Attorney for the Southern District of New York, said in a statement. The Securities and Exchange Commission filed separate civil charges against Madoff. Authorities said that, according to a document filed by Madoff with the U.S. Securities and Exchange Commission on January 7, 2008, Madoff’s investment advisory business served between 11 and 25 clients and had a total of about $17.1 billion in assets under management. Those clients may have included other funds that in turn had many investors. The SEC said it appeared that virtually all of the assets of his hedge fund business were missing. An investor in the hedge fund said it generated consistent returns, which was part of the attraction. Since 2004, annual returns averaged around 8 percent and ranged from 7.3 percent to 9 percent, but last decade returns were typically in the low-double digits, the investor said. The fund told investors it followed a “split strike conversion” strategy, which entailed owning stock and buying and selling options to limit downside risk, said the investor, who requested anonymity. Jon Najarian, an acquaintance of Madoff who has traded options for decades, said … “Many of us questioned how that strategy could generate those kinds of returns so consistently.” Najarian, co-founder of optionmonster.com, once tried to buy what was then the Cincinnati Stock Exchange when Madoff was a major seatholder on the exchange. Najarian met with Madoff, who rejected his bid. “He always seemed to be a straight shooter. I was shocked by this news,” Najarian said. “Bernard Madoff is a longstanding leader in the financial services industry,” his lawyer Dan Horwitz told reporters outside a downtown Manhattan courtroom where he was charged. “We will fight to get through this unfortunate set of events.” A shaken Madoff stared at the ground as reporters peppered him with questions. He was released after posting a $10 million bond secured by his Manhattan apartment. “Our complaint alleges a stunning fraud — both in terms of scope and duration,” said Scott Friestad, the SEC’s deputy enforcer. “We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors.” Madoff had long kept the financial statements for his hedge fund business under “lock and key,” according to prosecutors, and was “cryptic” about the firm. The hedge fund business was located on a separate floor from the market making business.
Re Madoff Blowout:

Now, the collateral damage is likely to add to the chaos that has already been ravaging hedge funds. Spooked by losses and forced to raise cash quickly as the financial crisis ballooned, investors have sought to pull out their money from hedge funds, causing serious pain, and even some forced closures. A growing list of large, well-known firms have sought to block redemption requests in an effort to stem a mass exodus of investors who now desperately want to get into cash. In a letter sent Friday, the Citadel Investment Group said it was halting redemptions at its two largest hedge funds through March 31. Confidence will only weaken further with the Madoff firm scandal, intensifying pain for the industry. “If you couple this with the deleveraging already, this means one thing: more redemptions,” said Campbell R. Harvey, a professor at the Fuqua School of Business at Duke University.

 

[bbmac]

Hedge funds’ future might lie in the past

By James Mackintosh , FT.com (Published: December 10 2008 19:32 | Last updated: December 10 2008 23:26)



One possible outline of the future of hedge funds is beginning to emerge from the wreckage of the industry’s six-year boom, and it looks very much like the business did in the 1980s, but with lower fees.

Several of the biggest hedge funds, including the venerable Tudor Investment Corp, run by Paul Tudor Jones, are returning to their roots as traders of the most liquid currency, interest rate and equity index markets. Both have split off toxic, hard-to-sell assets into special vehicles from which investors cannot withdraw their money.

Other funds trading illiquid instruments – credit, structured products and complex derivatives – are stopping investors getting their money back, as they try to defer forced sales of assets. Many are likely to shut down as they eventually pay back disgruntled clients.

At the same time, all the strategies that relied heavily on borrowed money are dead in the water as banks cut their lending and regulators pay more attention.

It is still early to draw conclusions, but the powerful industry appears to be splitting in two. At one end are the funds that can easily sell their holdings to repay investments, following strategies such as global macro – Tudor’s core – and long-short equity trading, which makes up about a third of funds.

At the other end will be funds with long lock-ups, more akin to private equity vehicles, which can justify the restrictions on withdrawals by investing in hard-to-trade assets.

Centaurus Capital, a London hedge fund that is shrinking its main fund after efforts to restrict withdrawals failed to win investor support, is planning two new funds following this model. One will be highly liquid, the other will have long lock-ups, rather than the existing fund mixing the two.

Ratan Engineer, head of the asset management practice at Ernst & Young, says investors caught out by hedge funds invoking small print to restrict withdrawals will now demand more transparency.

“People are going to say they need to understand the underlying instruments, and if they are liquid they will not accept long notice periods and gates,” he says. “But if there is a good investment reason they will accept long lock-ups.”

Increasing transparency is anathema to many secretive funds, which often worry about copycat investments or attacks on their positions.

But they may find it hard to resist investor demands as they try to retain investors, many of whom are quitting the industry.

Morgan Stanley estimates that from June to the end of the year the industry will shrink 35-45 per cent, with redemptions of 25-30 per cent in Europe and 15-20 per cent in the US.

Investors who want to stay are already demanding the removal of some extended notice periods for withdrawals, which they regard as unjustified, and lower fees in return for their loyalty.

“The shoe’s on the other foot now,” says one prominent investor in hedge funds. “Up to now the hedge funds have held the power so they have been able to impose these ridiculous fee terms and lock-ups. We are putting on our size 12s and kicking our managers, telling them change these terms or we are going to pull our money.”

The heads of five funds running more than $15bn, and numerous smaller funds contacted by the Financial Times all said they expected fees to drop – although some thought they would get money locked up for longer in return.

“Hedge funds will want longer-duration capital,” says the founder of one of the US’s largest funds. “You are going to have to incentivise investors through lower fees.”

Another warns that competition is likely to increase, prompting fee cuts, as funds struggle to survive. Many funds are well below previous highs, known as high-water marks, meaning they face no prospect of earning performance fees this year or next.

“People who are down 20 per cent are so far below their high-water marks that they have to get in new money just to pay the bills,” says the founder of one of London’s largest funds. “So they are offering lower fees.”

This is already visible in the fund of hedge fund business, where some recent mandates have been awarded at less than half the fees usually charged, according to managers.

Other managers and investors are discussing whether funds should charge fees only on realised profits, the standard practice in private equity, not paper profits.

Some new funds also have been offering surprisingly low fees, investors say. For example, a new fund from London-based Ferox, designed to capitalise on the crisis in convertible bonds by taking directional positions, has a fixed two-year life and fees of either 1 per cent a year and 10 per cent of profits or just 15 per cent of profits on returns above an annual 10 per cent.

“A lot of the corruption of the [hedge fund] proposition is being laid bare and will be eradicated,” Mr Engineer says.

The change to a new model is happening fastest at funds that have hit problems or been faced by very large withdrawals.

Mike Novogratz and Adam Levinson, managers of Fortress’s Drawbridge fund, for example, told investors last week they planned to “offer an opportunity for reduced fees” on the fund, as well as focusing on highly liquid trading strategies.

The $7.2bn Drawbridge faces $3.51bn of redemptions, which it has suspended, after falling almost 23 per cent in the year to the end of November.
Copyright The Financial Times Limited 2008

 

[BSD]

The fallout of what BB already posted, the 50 billion Maddof ponzi scheme:

A Palm Beach Enclave, Stunned by an Inside Job

PALM BEACH, Fla. — The room of somber whispers fell silent when the two men walked in.

Just days after the collapse of Bernard L. Madoff’s suspected $50 billion Ponzi scheme, two of his emissaries returned to the epicenter of the financial disaster to face some of the hardest-hit investors, many of them old friends whom they had recruited to invest in Mr. Madoff’s firm.

As Carl J. Shapiro and Robert M. Jaffe sat down at the Men’s Grill of the Palm Beach Country Club they scanned an awkwardly quiet room, seemingly looking for friendly faces and reassuring nods.

The moment was a stark reversal for two men whom people used to trip over themselves to meet in hopes of a chance to invest with Mr. Madoff.

“You doing O.K.?” asked one of the several club members who approached the men in a show of support. “We’re here for you.”

While the fallout from Mr. Madoff’s suspected con game shook investors around the world, perhaps nowhere was there a higher concentration of victims than in this room. Investors were said to have paid hundreds of thousands of dollars a year to remain members of this club in hopes of an introduction to Mr. Madoff, usually by Mr. Jaffe or Mr. Shapiro. Mr. Madoff has been a member since 1996.

But more than wealth, these people seemed to have lost a sense of trust and prestige. During a visit to the club on Saturday, many members, asked for their reactions, requested not to be named because they did not want to ruin their standing among friends.

In Mr. Madoff’s fall, their world turned upside down, they said. Those who prided themselves as financially savvy suddenly seemed gullible. The trusted friend, sage adviser and model philanthropist they thought they knew was now charged with being a multibillion-dollar swindler.

There is no evidence that either Mr. Shapiro, who is 95 and joined the club in 1974, or his son-in-law, Mr. Jaffe, who is 64 and joined in 1992, knew of the fraud. Both men, who give millions every year to countless charities, are also said to have been duped of hundreds of millions of their own money, according to friends of their families.

But as a steady stream of older men in pastel sweaters and sockless penny-loafers slowly stood and approached the center table for hushed conversations and to offer pats on their backs, Mr. Shapiro and Mr. Jaffe looked ashen.

“All I can say is that this is an awful awful time for us,” Mr. Shapiro’s wife, Ruth, said in a short phone interview.

This was not the first swindle to hit this country club, which was formed in the 1950s by Jewish residents who had been barred from other island haunts.

Only three years ago, a handful of its members were victims of a similar, albeit smaller, pyramid scheme. Two men, John and Yung Kim, ran a company called the KL Group, which was based on the island and bilked investors of more than $190 million.

“But everyone at the club saw this differently,” said Laurence Leamer, an island resident and author of a forthcoming book, “Madness Under the Royal Palms,” about the island’s elite.

“Anyone can get robbed,” he said. “Madoff’s scam was so much worse because he was one of their own.”

Everywhere at the club, it was the topic of conversation.

Upstairs in the women’s dining room, a woman joked that she now knew the proper way to pronounce his name.

“Made off,” she said. “You know, like he made off with all our money.”

Even off the island, many investors said they were impressed with how careful Mr. Madoff had seemed.

“He just didn’t make mistakes,” said Richard Spring, 73, from Boca Raton. “He was just a sound, smart, reasonable guy.”

Mr. Spring recounted meeting Mr. Madoff in the early 1970s when they shared a helicopter each day commuting from Long Island to Wall Street.

He said he vividly recalled one commute when Mr. Madoff “bawled out” one of his traders for sloppy work, not protecting against a downturn.

Impressed, he later invested with Mr. Madoff, over time putting more than $11 million into the firm, virtually every cent of his savings, he said.

“I’m taking care of my sick mother-in-law. My wife has cancer. I just can’t deal with it,” Mr. Spring said, only barely choking back tears. “I’m cooked.”

The shock and sense of betrayal reached far beyond the country club."

Continued:
http://www.nytimes.com/2008/12/15/business/15palm.html?pagewanted=2&_r=2&dbk

VERY amazing how this could have gone on on such a massive scale for so long...

 

[bbmac]

Madoff fall-out spreads worldwide

The fallout from Bernard Madoff’s alleged $50bn fraud spread through the global financial system on Monday as more banks revealed exposures to his firm and the beleaguered hedge fund industry braced for withdrawals from worried clients.

The potential losses reported by large financial institutions that invested or lent to investors in Mr Madoff’s failed venture reached $10bn after HSBC confirmed the news, first reported in the Financial Times, that it could lose up to $1bn.

The nationalised Dutch arm of Belgian bank Fortis admitted losses could reach €1bn ($1.4bn), while Royal Bank of Scotland joined BNP Paribas and Banco Santander among the high-profile victims of the scandal, saying it might lose up to £400m ($612m). Japan’s Nomura has Y27.5bn ($300m) at risk.

Where is the $50bn loss?
An interactive guide to exposure of investors in Madoff’s venture
The affair has called into question the business model of funds of hedge funds – which run about $685bn in assets – after many of the biggest failed to spot warning signs. London-listed Man Group, Arki Busson’s EIM Group, and Tremont of the US have all admitted holdings in funds linked to Mr Madoff.

Funds controlled by Tremont, owned by the insurer MassMutual, had more than $3bn invested with Mr Madoff, said people close to the situation.

The investments by the hedge funds came despite the fact that some experts and Wall Street traders had raised concerns over the internal controls, business model and suspiciously consistent good performance of Mr Madoff’s business.

“This was the train wreck that happened in broad daylight,” said Jim Hedges, a hedge fund adviser who did not place any investors’ money with Bernard Madoff Investment Securities.

Hedge fund managers said they expected withdrawals as clients and funds of funds rushed to raise money to cover losses from the alleged “Ponzi scheme” – in which investors’ pay-outs are funded not with real returns but with cash from new investors.

The Securities Investor Protection Corp, an insurance body funded by the securities industry, said it had begun liquidating Bernard Madoff Investment Securities.

But as federal investigators and the court-appointed receiver sifted through the New York headquarters of the firm, the list of victims continued to grow.

Banque Benedict Hentsch, a Swiss private bank, on Monday terminated its three-month-old agreement to merge with Fairfield Greenwich, a hedge fund, after Fairfield revealed more than half its $14bn under management was held by Mr Madoff.

Reporting by FT.com Francesco Guerrera, Henny Sender, Deborah Brewster, Nicole Bullock and Saskia Scholtes in New York, and James Mackintosh in London

 

[BSD]

Some more real life fallout from the Madoff bloodbath:

"Beyond the financial fallouts in Palm Beach of the Bernie Madoff scandal, the very social fabric of The Island may find itself altered forever.

Formerly rich families will be uprooted.

Former friends are at each other’s throats.

While Realtors are lining up to grab the expected sales of mansions whose owners lost the millions they invested with the disgraced Wall Street big, one scene at Mar-a-Lago Saturday night illustrates the tension.

Several eyewitnesses at the 60th birthday party for carpet king John Stark tell me that two of the major players in this scandal came face-to-face.


It wasn’t pleasant.

On one side was Bob Jaffe. The philanthropist has been criticized here for directing big-deal investors to Madoff Investment Securities – the firm that, federal authorities said, lost $2 billion of its clients money in what amounted to a Ponzi scheme. Jaffe admitted to being paid for his referrals.

Jaffe, who is not under investigation, and his wife, Ellen, apparently made the mistake of showing up at Stark’s birthday barbecue. Several Madoff clients, too, were among the 70-plus guests. One had mortgaged two homes to maximize his investment. Another put in $20 million from a child’s trust fund.

“Why Bob would show his face after what happened,” said one guest, “is beyond me.”

So, one of the bigger losers in the Madoff collapse, Nine West shoes founder Jerome Fisher, verbalized what others were thinking. Fisher, according to published reports, may have lost $150 million.

He reportedly told Jaffe: “You’ve got a lot of nerve showing up here!”

It went downhill from there.

“They were about to go at it,” said one spywitness. “There was some pushing and yelling. I’d never seen anything like this at Mar-a-Lago. Jerome is a tough cookie. He made some really threatening comments to Bob, as he well should have. It was a wild scene.”

With Mar-a-Lago owner Donald Trump standing nearby, several Stark well-wishers stepped in and separated the men.

Neither Fisher, already a victim of the $200 million-collapse of the KL Group here in 2007, nor Jaffe left. They just avoided one another.

Trump told Page2Live: “It was a great party, but it was one like none other. There were a lot of unhappy campers there.”

Neither Jaffe nor Fisher returned calls. A Jaffe family spokeswoman, Carey O’Donnell said Jaffe denies the incident occurred.

“I don’t know where you’re getting this from, but it categorically didn’t happen,” O’Donnell said.

Madoff, 70, was arrested last week in what could become the biggest swindle in American history. Madoff used fresh money from some investors to cover the losses of others. He promised outrageously high interest rates, some as high as 15 percent."
Palm Beach & South Florida gossip & celebrity news | Jose Lambiet?s Page2Live.com Madoff investors face off in Palm Beach

 

[BSD]

Madoff Scheme Was ‘Impossible’ to Do Alone, Says EIM’s Busson

By Tom Cahill and Stephanie Baker

Dec. 16 (Bloomberg) -- Bernard Madoff’s alleged Ponzi scheme, which might have cost investors $50 billion, couldn’t have been carried out alone, said Arpad ‘Arki’ Busson, chairman and founder of Swiss investment firm EIM SA.

“For the amount of money and number of accounts, it’s practically impossible that he was doing this alone,” said Busson, whose $11.5 billion fund of hedge funds had about $230 million invested with Madoff. “What’s mind-boggling is the amount of assets and the amount of time he was doing it.”

EIM, which manages accounts for mostly institutional clients, invested with funds that had managed accounts overseen by Madoff. EIM will likely write down its stake to zero, Busson said. Madoff was arrested Dec. 11 after he told his sons that Bernard L. Madoff Investment Securities LLC was a fraud, according to the U.S. Securities and Exchange Commission.

“There’s only so much due diligence you can do, and in hindsight you always wish you could have done it differently,” Busson said in a telephone interview. “Catching a fraud like this is practically impossible. He seemed like a very experienced, knowledgeable and trustworthy man, like the best con artists always are.”

About two-thirds of EIM accounts had no holdings with Madoff, while no single account had more than 5 percent, Busson said. EIM, based in Nyon, Switzerland, gained comfort with Madoff because one of the feeder funds produced a statement of accounts that showed “every trade” and that was audited by PricewaterhouseCoopers, Busson said.

Not From ‘Boondocks’

Madoff’s history showed he was “not someone from the boondocks,” Busson said. Madoff had been head of the trading committee at the Securities Industry Association, Wall Street’s biggest trade group, and served as chairman of the Nasdaq Stock Market, advising on new stock-market rules in response to the growth of electronic trading.

Unlike most hedge funds, Madoff’s business was regulated by the SEC, giving investors an added layer of protection, Busson said.

“I knew the SEC was all over this shop. As a broker-dealer, you file quarterly statements,” he said. “The main reason we got comfort is that it was SEC-regulated, and it was doing 10 percent of the volume on the New York Stock Exchange and Nasdaq.”

Madoff ran his investment advisory business from a separate floor of his firm’s New York offices, keeping financial statements “under lock and key,” prosecutors said. Early in December, he told one employee that clients wanted to redeem about $7 billion and that he was struggling to free up the funds, the government said.

Reduced Stake

EIM was in the process of “trimming back” its holdings with Madoff when the fraud came to light, Busson said. He thought an employee was joking when he called and said Madoff had been arrested, Busson said.

The complexity and duration of the fraud made it unlikely that he could have operated it alone, particularly because Madoff took vacations, he said.

Busson said he last saw Madoff in July at an airport in Nice, on France’s Mediterranean coast.

Bloomberg.com: News

Well that's sort of stating the obvious, that one single person can't be behind a 50 Billion Ponzi...

 

[BSD]

But seems there's some hope at least for some:

"Madoff’s Indirect Investors May Recover Some Money, Lawyer Says

By Alexis Leondis

Dec. 16 (Bloomberg) -- Indirect investors who got ensnarled in Bernard Madoff’s alleged $50 billion Ponzi scheme have a better chance of recovering their money than direct investors, says a securities-arbitration lawyer.

Investors who went through a third-party such as a hedge fund or a broker can turn to a lawsuit or arbitration, said Jacob Zamansky, a securities-arbitration attorney based in New York.

“Since these third parties didn’t do the appropriate due diligence before turning their clients’ money over to Madoff’s firm, they are liable,” according to Zamansky, who said he has been retained by about 12 clients who invested directly or indirectly with Madoff.

“Those third parties have ‘deeper pockets,’ so there’s a good possibility investors will get a substantial portion, if not all of their money returned,” Zamansky said.

Madoff was arrested Dec. 11 after he told his two sons that clients of his New York-based investment-advisory firm lost $50 billion in a “giant Ponzi scheme,” according to the Securities and Exchange Commission.

For direct investors, “filing a lawsuit is throwing money out the window in legal fees,” said James Cox, a securities law professor at Duke University in Durham, North Carolina.

“By the time they collect all of Madoff’s assets and liquidate them, providing there are no ‘clawbacks,’ there will probably just be enough to pay the attorneys’ fees,” said Cox. A so-called clawback is when money that has been distributed is reclaimed to recover proceeds for other investors.

The Securities Investor Protection Corp., a government- sponsored group that protects clients when brokerages fail, is liquidating Bernard L. Madoff Investment Securities LLC, according to the Washington-based organization.

‘Utterly Unreliable’

It will take six months to sort out Madoff’s records, said Stephen Harbeck, president of SIPC, on Bloomberg Television. Harbeck described Madoff’s records as “utterly unreliable.”

“There are some assets, but I have no idea what the relationships of the assets available are to the claims against them,” Harbeck said.

SIPC insures as much as $500,000 per customer account for money that is stolen, not lost because of declining investments. According to its Web site, SIPC has a reserve of slightly more than $1 billion.

Those who invested with Madoff through his investment advisory firm, which he allegedly used to run the Ponzi scheme, won’t be covered by SIPC, said Stuart Meissner, a former securities regulator who is now an investor lawyer based in New York. Only direct investors in Madoff’s brokerage firm will be covered, he said.

‘Gray Area’

If the securities appearing on statements were fictitious and not in customers’ accounts, “coverage becomes a gray area,” said Meissner.

If SIPC makes an insurance payout, it may take up to two years for investors to get the distribution, Meissner said.

Investors also may have to wait several years for a trustee to sell off the assets or let them mature before receiving a pro- rata distribution, said Mercer Bullard, a University of Mississippi law professor and former mutual-fund attorney at the SEC.

Those who closed their accounts with Madoff within the last year “need to be aware that there could be a clawback,” Zamansky said.

While authorities unscramble the Madoff case, both indirect and direct investors need to gather all documents to prove their claims, said the securities lawyers and law professors.

Offering Memorandum

The most important document for investors who used a hedge fund as a third party is the offering memorandum that lists the rules under which the fund operates, said Bullard, the University of Mississippi law professor. Peripheral documents including e- mails and marketing materials from firm employees are also helpful for proving claims, Bullard said.

Zamansky recommended gathering copies of checks, wire transfers and monthly or annual statements reflecting investments.

The only consolation for some who invested with Madoff may be a tax write-off because losses due to theft can usually be deducted.

“There probably isn’t any redress in all this except the delight at having a deduction on your tax return,” Cox said."

Bloomberg.com: News

 

[BSD]

“There’s only so much due diligence you can do, and in hindsight you always wish you could have done it differently,” Busson said in a telephone interview. “Catching a fraud like this is practically impossible. He seemed like a very experienced, knowledgeable and trustworthy man, like the best con artists always are.”

If that weren't so sad it'd be funny, but true enough it undeniably is.

Seems to me some auditors and accounting firms need to be drawn to account.

Didn't anything change after Enron ?!?

What is the reasoning of going to all the trouble of auditing your track record when apparently to all intents and purposes it's entirely meaningless ?

 

[BSD]

EIM, based in Nyon, Switzerland, gained comfort with Madoff because one of the feeder funds produced a statement of accounts that showed “every trade” and that was audited by PricewaterhouseCoopers, Busson said.

Unlike most hedge funds, Madoff’s business was regulated by the SEC, giving investors an added layer of protection, Busson said.

“I knew the SEC was all over this shop. As a broker-dealer, you file quarterly statements,” he said. “The main reason we got comfort is that it was SEC-regulated, and it was doing 10 percent of the volume on the New York Stock Exchange and Nasdaq.”

So is all that entirely meaningless.

This wasn't some dodgy auditor from the Cayman islands in cahoots with the fund, this was PWC...

AND the SEC...

How on earth can one trust any fund manager or anybody else for that matter ever again when a Ponzi scheme like that could unfold over FOUR decades despite all of those security measures...

Absolutely mindboggling.

 

[TomTom]

BSD what you say is right.
FSA, PWC & SEC have authority to edit these firms, however they dont understand how the business opperates.
I they did we would not be in the situation we are in now.
Its like getting a farmer to go and audit NASA , the result we be the audit has been done and I found nothing wrong, then the following week all hell breaks loose.

 

[BSD]

Thing is, we had Enron.

Now this.

50 billion down the drain.

In spite of PricewaterhouseCoopers auditing and the SEC all over the place.

It still happened.

So isn't that a monumental blow to what is most important in an economy, consumer confidence ?

How can anyone still have confidence in anything if even such allegedly fail proof safety systems in place are de facto irrelevant ?

I really don't get that.

I mean, Madoff was running this for an incredible almost FIFTY years ?!?

There must be some real systemic faults for that to be possible, something must be fundamentally wrong in the current system of checks and balances.

 

[BSD]

The saga continues:

S.E.C. Issues Mea Culpa on Fraud Case

THE NEW YORK TIMES

The Securities and Exchange Commission said Tuesday night that it had missed repeated opportunities to discover what may be the largest financial fraud in history, a Ponzi scheme whose losses could run as high as $50 billion.

The commission said it received credible allegations about the scheme at least nine years ago and will immediately open an internal investigation to examine why it had failed to pursue them aggressively.

The S.E.C. issued the statement hours after Bernard L. Madoff, the 70-year-old Wall Street executive accused of operating the scheme, discussed the fraud with federal authorities at a meeting in New York on Tuesday, according to people briefed on the meeting.

“Our initial findings have been deeply troubling,” Christopher Cox, the S.E.C. chairman, said in his statement. The commission received “credible and specific allegations regarding Mr. Madoff’s financial wrongdoing,” but did not respond aggressively, he said.

“I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them,” Mr. Cox said.

Moreover, Mr. Cox said, the commission will investigate “all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm.” Mr. Cox added that he had ordered S.E.C. staff to recuse themselves from the investigation if they had “more than insubstantial personal contacts with Mr. Madoff or his family.”

One of the commission’s investigative teams that had examined the Madoff firm was headed by a lawyer named Eric Swanson, who served for 10 years as a lawyer at the commission and left in 2006 while he was an assistant director of the office of compliance inspections and examinations in Washington.

In 2007, Mr. Swanson married Shana Madoff, a niece of Bernard L. Madoff and daughter of his brother, Peter Madoff, the firm’s chief compliance officer. Ms. Madoff is the firm’s compliance attorney.

Eric Starkman, a spokesman for Mr. Swanson, said that Mr. Swanson’s “romantic relationship with his wife began years after the compliance team he helped supervise made an inquiry about Bernard Madoff’s securities operations.” And Randy Williams, a spokesman for Mr. Swanson’s current employer, BATS Exchange in Kansas City, said that Mr. Swanson had not participated in any inquiry of into the Madoff firm or its affiliates while he was involved in a relationship with Ms. Madoff.

Besides investigating Mr. Madoff, regulators are now in the embarrassing position of examining whether they should have caught him sooner.

Mr. Madoff kept several sets of books and false documents and lied to regulators when they questioned him in previous examinations of his firm, Bernard L. Madoff Investment Securities, Mr. Cox said.

Investigators never used subpoena powers to obtain information, but rather “relied on information voluntarily produced by Mr. Madoff and his firm,” Mr. Cox said.

When he was arrested last week, Mr. Madoff estimated that investors lost as much as $50 billion in the fraud, according to court filings. Mr. Madoff has said the scam was a Ponzi scheme, a type of fraud in which early investors are paid off with money from later victims, until no more money can be raised and the scheme collapses.

Over the decades, Mr. Madoff steadily expanded his circle of investors, drawing in small individual investors, charities, pension funds, prominent billionaires and European banks. On Tuesday, a Vienna bank, Bank Medici, became the latest major institution to acknowledge it was a client of Mr. Madoff, saying it had $2.1 billion invested with him. Institutions and individuals have now reported losses of more than $20 billion.

Stephen Harbeck, the chief executive of the Securities Investor Protection Corporation, which has taken control of Mr. Madoff’s firm through a trustee, said the firm appeared to have multiple sets of books and that he was unsure how much money, if any, Mr. Madoff’s clients would eventually recover.

“The trustee and SIPC have been involved in this case for about 24 hours,” Mr. Harbeck said. “You’re talking about an ongoing fraud that lasted for decades.”

Attorneys for Mr. Madoff declined to comment on Tuesday night about Mr. Madoff’s conversations with government authorities.

“We have said from the beginning that we are cooperating fully with the government investigation,” said Ira Lee Sorkin, one of the lawyers. When pressed, Mr. Sorkin said he had used “we” to refer to “the company, whose sole shareholder is Bernie Madoff.” Mr. Sorkin would not confirm that Mr. Madoff himself was providing first-hand cooperation.

Extensive cooperation from Mr. Madoff could substantially shorten the time it will take for regulators to track down any available assets, locate any other people who may have been involved in the fraud and determine whether investors will recover any of their losses.

The first indication that Mr. Madoff might be talking to authorities came at midmorning, when a federal judge delayed a bond hearing for Mr. Madoff that had originally been set for 2 p.m. Tuesday afternoon.

At the request of federal prosecutors, the hearing was rescheduled for the same time on Wednesday. No reason for the postponement was given, nor would the federal prosecutor’s office or Mr. Madoff’s lawyers comment on the delay.

Mr. Madoff was arrested at his Upper East Side apartment in Manhattan last Thursday by F.B.I. agents, after his two sons — both of whom work for the company — reported that he had confessed to them that his money-management business was “basically, a giant Ponzi scheme” and “a big lie.”

The criminal complaint under which he was arrested charged him with a single count of securities fraud. He surrendered his passport and was released on a $10 million bond, secured by his apartment and co-signed by his wife and his brother, Peter Madoff, who was also the general counsel at his trading firm.
http://www.nytimes.com/2008/12/17/business/17madoff.html?_r=2&ref=business

 

[bbmac]

simpple whiteboard explanation of a hedge fund

A look inside hedge funds on Vimeo

 

[bbmac]

Not All Hedge Fund Strategies Stink This Year

December 18, 2008, 9:42 am
Marketwatch.com
Not All Hedge Fund Strategies Stink This Year
Geoffrey Rogow reports:

Although losses and redemptions are drastically shrinking the entire hedge fund world, global macro funds are garnering more interest because of their stronger returns and easy availability of liquidity.

Global macro funds — which make broad bets, such as playing one country’s currency or stock market indexes against others, often using derivatives — are one of the only strategies tracked by the Hennessee Hedge Fund Index that has posted a gain in 2008, including a rise of 1.23% for November. With cash reigning as king these days, investors are shunning funds that cannot return principal quickly, like those that specialize in fixed-income investments or merger arbitrage situations.

“If you look at the performance of hedge funds, global macro guys have shown the best performance. Certainly, wealthy people have taken notice,” said Quincy Krosby, chief investment strategist for Hartford Financial Services Group Inc.

Among the leaders, a $15 billion global macro fund run by Brevan Howard Asset Management gained 3.7% in November, and is up 21.2% for the year, according to investors. Other global macro shops that have done well include the Comac Global Macro Fund, which is up by more than 29% this year. And Bruce Kovner’s $6 billion Caxton Global Investment LTD Fund was up 11.5% year-to-date through Dec. 2, according to investors.

It’s not just high-net-worth clients, who can change direction of their money quickly, who are looking more at global macro. Larger investors, like pension funds and hedge funds of funds, have put global macro at the fore of their 2009 plans. Overall, macro strategies accounted for $300 billion, or 19%, of total industry assets of $1.564 trillion on Oct. 31, according to Hedge Fund Research Inc., up from 15% at the end of 2007 Through Oct. 31, that area of hedge funds rose 4.4% this year, according to HFR.

“They trade in liquid markets, like futures, with an event horizon of two hours and two weeks. This enables them to take advantage of this short-term choppiness the market has presented better than most,” said Joseph Gieger, a managing director with hedge fund of funds GAM, a unit of Julius Baer Holding AG, with total assets under management of $66.8 billion as of June 30.

One of a long list of investors looking to explore global macro strategies further is the $153.9 billion New York State Common Retirement Fund, which has steadfast guidelines provided by New York state laws to restrict risk. The fund had roughly $5 billion committed to a variety of hedge funds and funds of funds as of March 31.

Jim Fuchs, a spokesman for the New York State Common Retirement Fund, said the hedge-fund allocation is currently shifting from one that invests mostly in hedge funds of funds to a strategy that invests in hedge funds directly. And, in the move to specific hedge funds, tactical trading, global macro funds and Commodities Trading Advisers, or CTAs, could see a significant increase.

As of Oct. 31, Hedge Fund Research data showed that macro and “short-bias” funds were the only two hedge fund groups in the green this year, with short-bias posting a 31% jump year-to-date and a 5.4% gain in November.

 

[anley]

December 18, 2008, 9:42 am
Jim Fuchs, a spokesman for the New York State Common Retirement Fund, said the hedge-fund allocation is currently shifting from one that invests mostly in hedge funds of funds to a strategy that invests in hedge funds directly. And, in the move to specific hedge funds, tactical trading, global macro funds and Commodities Trading Advisers, or CTAs, could see a significant increase.

The poor guy has probably only just realised how much he was getting raped on fees and charges so he's going direct.

70% of the Hedge Fund business is a legal scam designed to fleece investors caught up in the latest fashion out of fees. And Fund of Funds are the worst for skimming fees.

Hedge funds are also a great example of just how hard it is to make money overtime in this game.