“Not a year has gone by during the past 15 that I have not contemplated what Bernie Madoff did (or didn’t do) to make his money,” said the anonymous finance blogger ‘Cassandra’. Sadly, not everyone was so curious. With hedge fund manager Madoff now under arrest for an alleged $50bn fraud, the big question is how he got away with it for so long in the face of many sceptics. A 2001 article in MAR Hedge suggested very strongly that his incredibly consistent returns of 1.5% a month were suspect. In the same year, Barron’s said that “to take it at face value is a bit naïve”. Securities & Exchange Commission (SEC) chairman Christopher Cox now admits that the agency received a decade’s worth of “credible and specific allegations” of wrongdoing.
Who comes out of this scandal the worst? The SEC was “no doubt at fault”, said Jeremy Warner in The Independent. And the headlines will hurt the hedge-fund industry. “But the real damage will be to the feeder funds.” More than 40% of hedge-fund money comes via funds of funds, which justify high fees “on the basis of the painstaking due diligence they carry out”, said David Wighton in The Times. “Oops.” Already battered by poor returns, this affair is a severe blow, said Richard Beales on Breakingviews. “If hedge funds are facing a painful shakeout, the result for funds of funds could be more like an earthquake.”